A major corporate credit evaluation firm today reaffirmed its B-negative rating on Advanced Micro Devices Inc. and warned that the company's debt-rating could be lowered early in 2008 if the semiconductor manufacturer failed to reverse the challenges it currently faces and improve upon its cash flow.
A negative credit rating means AMD would have to pay a premium to attract buyers of its corporate bond and further sink the company into debt.
Standard & Poor's Rating Services said in a statement today that it believed AMD's management had not effectively executed the company's turnaround plans and that the company continues to face strong competitive pressures from market leader Intel Corp. even as its cash position remains challenged.
AMD's recently disclosed plan to reduce capital expenditure, explore manufacturing as well as technology process development partnerships and sell some assets could help improve its cash position, according to S&P analyst Bruce Hyman. Even these plans cannot guarantee the company's successful turnabout in a weakening and competitive market, the analyst warned.
"The negative outlook reflects the significant challenges AMD faces in restoring profitability from currently depressed levels, and stabilizing cash flows despite a continued technology lag," Hyman said in the report. "A positive outlook would require reversal of current trends and demonstration that recovery could be sustained.'
S&P said it cut AMD's credit rating on the company's 7.75 percent senior notes due 2012 to B-minus from BB following the release of the "collateral securing" the debt.
The ratings agency noted that AMD's ability to cope with its financial position was eroded partly by its purchase last year of ATI Technologies, an acquisition the company funded in part by paying cash.
AMD "generated about $600 million negative free cash flows in the June quarter, and over $2 billion negative free cash flows in the past four quarters," according to Hyman. "Cash balances stood at $1.6 billion on June 30, 2007. Debt was $5.8 billion. Leverage will rise very substantially in September."