AMD Revises Debt Position to the Upside

Shares of Advanced Micro Devices (AMD) rose more than 10 percent on Wednesday after the company announced plans to reduce a crippling debt, a step made possible thanks to its big settlement with Intel last week.

AMD (NYSE: AMD) faces $3.2 billion in debt beginning to mature in 2012 at a very high interest rate of 7.75 percent. Prior to its big legal settlement with Intel (NASDAQ: INTC), the company was sitting at about $1.5 billion in cash, not a good position to be in when you owe more than twice as much in debt.

The $1.25 billion from its settlement with Intel certainly plays a role, in two ways: first, AMD CFO Thomas Seifert has a whole lot more money to work with than he did a week ago when he discussed AMD’s plan to pay down debt. Second, the settlement means finally getting Globalfoundries, its fabrication plants, completely off its books.

In a filing with the Securities and Exchange Commission, the company said it has made a tender offer for up to $1 billion of 5.75 percent convertible senior notes due 2012. It also said it would redeem $390 million of senior notes due Dec. 18, 2009 that carry 7.75 percent interest. This would be done with cash and $500 million of senior notes, due in 2017.

All of this is part of a debt payback plan that began before the settlement with Intel. Much of it can be done now that AMD has shed its foundries. AMD announced plans to spin off its foundries in May under the name Globalfoundries, which would compete with the likes of TSMC and other chip fabrication companies. It took a sizable investment from Advanced Technology Investment Company (ATIC), a government-owned investment firm in Abu Dhabi.

Because ATIC would be the majority owner of the new foundry company, Intel claimed its patent license agreement with AMD was in violation because AMD was transferring Intel IP to a third party. That forced the two companies into mediation, and it settled a number of issues, including an antitrust accusation against Intel.

On the fast track to fabless

Now free of any connections to Globalfoundries, this will effectively make AMD a fabless company within a year, predicts Craig Berger, semiconductor industry analyst with FBR Capital Markets. Losing the capital expenses of a foundry will help AMD quite a bit, he said.

“Their ten-year CAPEX [capital expenses] were $1.1 billion per year. Now it’s $100 to $200 million a year. So they just took a billion a year out of CAPEX. They’ve gone from $3 billion a year to $2 billion for OPEX [operating expenses] with the Globalfoundries spinout. So $2 billion a year of costs have been taken out of a company generating six billion a year in revenues. So that to me is transformative,” he told

Berger said he’d been expecting today’s action to tackle the debt. “Even a few days ago there was concern because they generated modest cash against heavy debt. The feeling was they would roll it over. Today’s action, while sooner than expected, is not surprising,” he said.

It allows AMD to get rid of debt at seven percent interest sooner rather than when it matures in three years and frees the company to start pursuing Intel more competitively. AMD has lagged behind on moving to 45 nanometers but is now catching up. AMD has said it is moving to 32nm for CPUs and 28nm for GPUs, which will make it more competitive.

“On the production front, which will certainly be helped by a more competitive process technology, I think they are working to improve their position. But that’s going to take time. They are just ramping out 45nm now, which Intel did two years ago. The products will improve once the process tech gap closes,” said Berger.

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