Weighing AMD's Replacement Financing Pact (AMD, INTC, NVDA)

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After looking at a new financing pact at Advanced Micro Devices Inc. (NYSE:AMD) the first reaction here was "these bankers really are using voodoo financing like we said back in April," but even if that is the case today’s note pricing actually looks like much less like voodoo for the buyer and seller on the surface.  It’s never easy to defend a bad situation, but when you see companies that are in trouble doing "less bad than before" the market usually reacts favorably.  Shares are down today with a weak market while NVIDIA (NASDAQ:NVDA) shares are up ahead of earnings, but this really doesn’t look that bad considering how we perceive the AMD situation right now.

Let’s compare today’s pricing to the prior voodoo financing:

  • The company priced $1.5 Billion worth of 5.75% convertible notes, and it did it a time where the credit markets are demanding far more than just a few months ago.  The notes will be convertible into shares of common stock based on an initial conversion rate of 49.6771 shares per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $20.13 per share.  This initial conversion price represents a premium of approximately 50% relative to yesterday’s close of $13.42 per share. Holders of the notes may require AMD to repurchase the notes for cash equal to 100% of the principal amount to be repurchased plus accrued and unpaid interest upon the occurrence of certain designated events (in other words there is still a death put, so to speak).  AMD intends to use the net proceeds of the offering, together with available cash, to repay in full the outstanding balance of the term loan AMD entered into with Morgan Stanley Senior Funding, Inc. in October 2006.
  • The prior deal, which went from $1.8 Billion up to $2.2 Billion carried a 6% coupon on the convertible note and didn’t mature until 2015.  But the prior conversion price was $42.12 subject to capped call provisions.  The most surprising part of that offering was that it seemed like the investment bankers would have had to do whatever the could to keep from laughing when they sold the deal to AMD and to the buyer of the notes.

This new financing looks like it has gotten the rest of that old term loan of $2.5 Billion from Morgan Stanley Senior Funding (for the ATI acquisition) paid off, out of the way, and out of the creditor order.  The new financing is also a 144A private placement, so it is unknown who bought it and it is still not going into the hands of the public.  This isn’t without any debt covenants and doesn’t have a get out jail free card attached, but it cleans up that old financing and the terms seem better when you compare the financial markets of today to the financial markets in April.

AMD’s shares actually rose into the last voodoo deal we talked about in April, but then had a couple of rough weeks before recovering again.  The last few weeks have been hard on the stock with shares trading briefly over $16.00 toward the end of July and shares around $13.00 today.  Predicting the pattern from here has too many variables and would be guesswork.  This will save in interest expense depending on the timing and interpretation of exit terms.  That is very subjective and very much on the surface, so don’t etch it into stone.  This deal also looks more fair to the actual note buyers with better convertible price terms. 

If AMD can focus more on some of the current offerings now and do more outsourcing to focus on design and R&D, then we might think a bit better of the company.  It would also be able to unload some of its factory land, assuming there is a buyer in the current liquidity crunch.  That entire scenario is still an IF and we do not really expect that in the near-term based on certain recent factory investments committed.    AMD is still at a crossroads right now where it still needs to decide on its core processors whether it wants to fight the biggest bad boy on the block named Intel (NASDAQ:INTC) or if it wants to accept a less dominant position that has more assured survival. 

Until we’ve gotten to weigh today’s environment more and see what some of the covenants and provisions in later filings are for sure, we aren’t going to give this a true thumbs up or thumbs down verdict.

Jon C. Ogg
August 9, 2007

Jon Ogg can be reached at jonogg@247wallst.com; he does not own securities in the companies he covers.

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