Times have been tough at chipmaker Advanced Micro Devices, but they just got a little bit tougher.
Fitch, the debt ratings agency, just sent word that it has downgraded AMD’s long-term debt to CCC from a B. For context, a B rating indicates debt that is considered two notches below investment grade, while CCC is three notches below. A company rated CCC, according to Fitch’s terminology, is considered “currently vulnerable and dependent on favorable economic conditions to meet its commitments.”
Specifically, Fitch says it expects AMD’s free cash flow to turn negative and reach a level below AMD’s targets, and it might even go so low as to “potentially approach the company’s minimum operating level.”
On top of that, Fitch expects sales growth to run in the mid to high teens as consumer spending on PCs continues to sputter and tablets like the iPad continue to eat into the notebook PC business.
As of the end of last year, Fitch said, AMD had enough cash, at $1.18 billion, on hand to keep things going, but as cash flow turns negative and big payments to its manufacturing partner, Globalfoundries — $215 million in 2013 and $200 million in 2014 — come due, the pressure will mount as the year goes on. “Fitch expects negative FCF of $250 million to $450 million for the current year, pressuring liquidity by the end 2013. The company has a stated target cash level of $1.1 billion and minimum operating cash level of $700 million,” the agency said. AMD’s total debt as of the end of 2012 was $2.1 billion.
AMD’s not sitting still. Restructuring measures under way are supposed to save $450 million in operating costs by September, and it has cut a sale-leaseback deal on its 58-acre campus in Austin that is expected to save between $150 million and $200 million. Cash consumption has, of course, been an ongoing concern for some time.
That may help buy a little time, but Fitch isn’t convinced: “Given AMD’s traditional PC markets represent the vast majority of sales, achieving the company’s target of 40-50 percent of sales from higher-growth markets will require a number of years.”
AMD reported a fourth-quarter loss that widened on weak PC sales, and is expected to announce another round of job cuts soon. In October it cut about 14% to 15 percent of its workforce, including cuts to be carried out by the end of the current quarter.