OREANDA-NEWS. March 16, 2016. Fitch Ratings has downgraded and withdrawn the ratings for Advanced Micro Devices, Inc. (AMD) including the Long-term Issuer Default Rating (IDR) to 'CCC' from 'B-'. See the full list of ratings at the end of this release

Fitch's actions affect about \\$2.2 billion of total funded debt. A rating Outlook is not assigned at the 'CCC' IDR level. Fitch has withdrawn AMD's ratings for commercial reasons. Fitch reserves the right in its sole discretion to withdraw or maintain any rating at any time for any reason it deems sufficient.

KEY RATING DRIVERS

The downgrade reflects prospects for negative free cash flow (FCF) over the intermediate term and the consequent liquidity issues and refinancing risk that could develop as the 2019 and 2020 debt maturities approach. Fitch's view is based on the execution risk involved in AMD's strategic plan, the success of which largely hinges on capturing share in the declining personal computer (PC) market, gaining scale in the highly competitive \\$15 billion data center market (where AMD currently operates a less than \\$300 million business), and accelerating growth in embedded and semi-custom products.

Fitch believes that it will be difficult for AMD to generate positive FCF at its current scale, given the significant costs already taken out of the business. We estimate that AMD would need to increase revenue by at least \\$700 million from its fiscal 2015 level of about \\$4 billion to generate positive FCF and approach an EBITDA level that would support a viable capital structure at the company's current debt load (in the context of low- to mid-30% gross margins).

Despite management's guidance for growth in fiscal 2016, Fitch's rating case assumes that AMD's revenue could decline again next year, as many of the company's growth catalysts (design wins in data center, ARM, IP monetization) are not expected to contribute meaningfully to revenue until at least 2017. Another year of declining revenue and negative FCF would place considerable pressure on AMD to achieve outsized growth in 2017 and 2018 in order to achieve EBITDA and FCF that would enable it to refinance the \\$1.05 billion of debt maturities coming due in 2019 and 2020 (excluding the \\$230 million currently drawn on the revolver) without a material reduction in existing debt terms.

Fitch does not expect AMD to experience liquidity issues over the next 12-24 months based on cash on hand of \\$785 million as of Dec. 26, 2015, \\$320 million of net proceeds expected in first half 2016 (1H16) from the company's joint venture (JV) with Nantong Fujitsu Microelectronics (NF), and \\$87 million of availability under the company's asset-backed loan (ABL) credit facility. Fitch believes liquidity could become a concern beginning in 2018 if AMD is unable to offset legacy product declines with new design wins in its growth segments. Following the contribution of the company's assembly, test, mark and pack (ATMP) facilities to the JV with NF and numerous sale leasebacks of office and industrial buildings over the past several years, future asset monetization opportunities appear to be limited, other than plans to license IP, the financial impact of which has yet to be quantified.

AMD's Recovery Ratings (RRs) reflect Fitch's belief that the company would be reorganized rather than liquidated in a bankruptcy scenario. To arrive at a reorganization value, Fitch assumes a 5x reorganization multiple and applies it to an estimate for post-restructuring operating EBITDA of \\$300 million.

The recovery scenario reflects our belief that AMD would shed exposure to legacy PC markets within the context of reorganization and focus on higher-growth-client APUs, semi-custom servers, high-end graphics and gaming-related royalties. This results in an adjusted reorganization value of \\$1.35 billion after subtracting administrative claims, and exceeds a projected liquidation value of \\$803 million.

Fitch estimates AMD's post-reorganization ABL would be fully drawn at reorganization, given still sizeable receivables, inventory and PP&E. The \\$500 million senior secured ABL would then recover 100%, resulting in an 'RR1' rating. Fitch estimates the approximately \\$2 billion of unsecured claims recover approximately 42%, resulting in an RR of 'RR4'.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:

--Mid-single-digit revenue decline in fiscal 2016 as ongoing weakness in Computing and Graphics offsets momentum in Enterprise, Embedded and Semi-Customer (EESC); low- to mid-single-digit revenue growth beginning in 2017 based on stable Computing and Graphics and acceleration in EESC as design wins in data center and semi-custom begin to materialize;
--Gross margin approaching low 30% area;
--Operating expenses remain between \\$320 million - \\$340 million per quarter;
--FCF negative through 2018;
--Capex margin of 2%
--One-time cash inflow of \\$320 million in 2016 from JV with NF.

RATING SENSITIVITIES
Rating sensitivities are no longer relevant given today's rating withdrawal.

LIQUIDITY
Liquidity as of Dec. 26, 2015 was adequate, with cash and cash equivalents of \\$785 million, 90% of which is held in the U.S. AMD also has a \\$500 million senior secured RCF, under which \\$87 million was available at Dec. 26, 2015. Despite Fitch's expectations for negative FCF, Fitch does not expect AMD to experience liquidity issues over the next 12-24 months, based on cash on hand of \\$785 million, \\$320 million of net proceeds expected in 1H16 from the company's JV with NF and \\$87 million of availability under the company's ABL credit facility. AMD has \\$600 million of debt maturing in 2019 and \\$450 million in 2020 (excluding the drawn portion of its revolver due 2020). Fitch believes liquidity issues could develop as these debt maturities approach if the company does not experience a significant turnaround in operating performance.

Total debt as of Dec. 26, 2015 was \\$2.2 billion and primarily consisted of:

- \\$230 million drawn on a \\$500 million senior secured RCF due April 2020;
- \\$600 million 6.725% senior unsecured notes due March 2019;
- \\$450 million 7.75% senior unsecured notes due August 2020;
- \\$475 million 7.5% senior unsecured notes due August 2022;
- \\$500 million 8.125% senior unsecured notes due July 2024.

The following ratings have been downgraded and withdrawn:

Advanced Micro Devices, Inc.
--Long-term Issuer Default Rating (IDR) to 'CCC' from 'B-';
--Senior secured revolving credit facility to 'B'/'RR1' from 'BB-'/'RR1';
--Senior unsecured notes to 'CCC'/'RR4' from 'B-'/'RR4'.