Jim - Another Downgrade in AMD's Bond Status
DCR Downgrades Advanced Micro Devices, Inc.; Removes
Rating Watch - Down
PR Newswire - July 14, 1998 17:02
Jump to first matched term
CHICAGO, July 14 /PRNewswire/ -- Duff & Phelps Credit Rating Co. (DCR) has downgraded Advanced
Micro Devices, Inc. (NYSE: AMD) senior secured notes to 'BB' (Double-B) from 'BBB-' (Triple-B-Minus),
senior unsecured debt to 'B+' (Single-B-Plus) from 'BB' (Double-B) and convertible subordinated notes
to 'B' (Single-B) from 'B+' (Single-B-Plus). Debt affected by this rating action totals $1.3 billion. With the
ratings changes, DCR has removed AMD from Rating Watch--Down.
The rating downgrade reflects a protracted decline in operating results, weaker semiconductor industry
conditions, and the company's continuing investment in production facilities and operating expenses to
capture a potentially sizable market opportunity with its K6 microprocessor. Although AMD's product
positioning puts it possibly on the verge of turning the corner in its microprocessor business, revenues
continue to fall short of expenses, and a deepening semiconductor industry slump and product transition
issues have hurt the company's communications, programmable logic and memory chip businesses
which still generated 58 percent of second-quarter revenues.
After overcoming a series of hurdles, AMD finds itself with an attractive microprocessor product, a list of
top-tier PC customers and capability to make enough units to satisfy increasing demand. The interest in
sub-$1,000 PCs plays into AMD's strengths, and if it spreads from U.S. retail to other PC markets,
could significantly expand AMD's prospects. The physical attributes of the K6 design (simpler
packaging and smaller die size) appear to give enough cost advantage compared to Intel products to
overcome the latter's scale and manufacturing efficiencies, allowing AMD to offer PC customers
equivalent integer performance at a 25 percent lower price.
However, AMD must continue to make substantial investments in plant and equipment, research and
development, and sales and marketing to exploit its microprocessor advantage. It is adding equipment
to bring its Austin wafer fabrication facility, Fab 25, to full production capacity and beginning to equip its
new fab in Dresden, Germany. The Dresden project is aided by German government grants and loan
guarantees but still increases AMD's fixed obligations. The company's R&D reached 26 percent of
second-quarter revenues. Although R&D is inflated by developmental expenses for Dresden, the
company must continue substantial investments to maintain its competitive design advantage. Similarly,
AMD is increasing marketing expenses to take advantage of the coming back-to-school and Christmas
prime PC sales seasons. Although these investments are nominally discretionary, scale is important to
AMD's financial profile, and it must spend to achieve higher revenue levels. Financing the investments
increases leverage and absorbs cash flow, reducing credit protection measures until the scale is
achieved.
DCR has reduced its AMD ratings to reflect current leverage, cash flow and debt coverage levels. DCR
recognizes the possibility of substantial near-term improvement driven by AMD's microprocessor
business, but weak semiconductor industry conditions and likely competitive reactions present difficult
challenges, adding to the high uncertainty normal to AMD's business.
SOURCE Duff & Phelps Credit Rating Co.
/CONTACT: Martin Ressinger, CFA, 312-368-5470, or ressinger@dcrco.com, or
George J. Podrasky, CFA, 312-368-3207, or podrasky@dcrco.com, both of DCR/
(DCR AMD)
{======================}
Paul |
