AMD's Debt Downgraded To One Notch Above Junk Status

Fitch, the debt rating agency, evidently wasn't pleased with what it heard during AMD's last conference call. The agency has cut AMD's debt rating from a B to a CCC-. That's the last step above default, and it echoes the agency's skepticism over whether or not AMD can continue as a going concern.

The agency writes:
The ratings reflect Fitch's expectations that negative free cash flow (FCF) in 2013 will drive cash below AMD's target level and potentially approach the company's minimum operating level. Beyond the near-term, Fitch believes a strong end market recovery and adoption of AMD's new products will be required to preserve cash during the company's multi-year transformation...

Fitch believes liquidity was sufficient as of Dec. 29, 2012, and consisted of $1.18 billion of cash and cash equivalents, including $181 million of long-term marketable securities. 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.

And there you have it. This is a question of cash flow, and whether or not AMD can continue to generate it. The company has plans to sell and lease back its own HQ, which should generate between $150-$200 million. In the past, when pressed for answers as to what AMD might do to remain liquid, company executives have stressed that they had other options without giving specifics on what those options are. This latest downgrade could damage AMD's ability to raise cash if investors are scared by the prospect that the company could fail altogether.

This year, everything hangs on uptake for Kabini and Temash. It's that simple. It's that stark. The Radeon HD 8000 series won't save AMD, even if the company fielded a next-generation GPU with triple-digit 3DMark 2011 scores and the ability to crap gold doubloons when overclocked. As impressive as a card like that might be, it's not going to be enough to alter NV's entrenchment in the time frame AMD has to play with (6-12 months).

The news from Sunnyvale is that Temash and Kabini are exceeding expectations and should be excellent parts. That's exciting. But in the midst of a contracting PC market, with tablets generally eating PC's lunch, it's not automatically exciting enough. Here's hoping AMD is able to launch the new chips soon -- and pick up a number of design wins in the process. Richland, the upcoming Trinity refresh, is important -- but it's not the part that'll make or break the company's future.