Does This Refinancing Make Sense?

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The other shoe just dropped. If this was what shareholders were expecting, Monday's market action on Advanced Micro Devices (NYSE: AMD  ) suddenly makes perfect sense.

Monday morning, the chip designer announced a $300 million debt offering -- in effect just a refinancing move on a loan that was due for repayment this month. That announcement didn't mention interest rates or loan terms, but given the cushiness of today's interest rate environment, let's assume that the terms were at least relatively favorable. After all, AMD's financial house is in way better order than it used to be. Selling off the expensive manufacturing arm worked wonders for AMD's balance sheet.

But as it turns out, that was just the first jab in a one-two punch combo. After Monday's closing bell, AMD priced the debt deal. The gross opening balance grew to $500 million, giving the company plenty of coverage for its expiring debt notes. That's good, smart money management, as AMD needs to worry about liquidity. A quick call to AMD confirmed that the company increased the debt offering to $500 million as a result of "good response."

On the other hand, these 10-year bonds carry a 7% interest rate. That's far more expensive than the 5.75% and 6% bonds they replace. Shock, horror, panic. Right?

Well, not so fast. The old bonds are of the convertible ilk while the new ones don't seem to be, so this refinancing should remove the potential for some dilution. AMD classified the expiring bond batch as short-term debt.

All things considered, this looks like a good move. Longbow Research, which tags AMD with a buy rating and an $8 target price, notes that "cash preservation is a prudent move" in these uncertain economic times. Fitch reiterated its B+ credit rating on AMD as a whole and gave a B+/RR3 grade to the new debt -- junk bonds, but in the upper echelons of that murky classification. And in a bullish move, Fitch upgraded AMD's rating outlook from "stable" to "positive." That's a stark contrast to the negative ratings outlook the company gets from both Moody's and S&P.

AMD needs a fat wallet in its back pocket to battle Intel (Nasdaq: INTC  ) on the processor front and NVIDIA (Nasdaq: NVDA  ) in the graphics market. Free cash flows have been mildly positive for the last five quarters, but everybody knows that PC sales are struggling under the combination of macroeconomic pressure and invading tablets. It's just a good idea to save some cash for a rainy day, even if it's borrowed money.

Intel's dominant stature in the chip market only magnifies AMD's cash needs. The plucky underdog's only chance to stay relevant is to invest big in research and development -- and marketing isn't cheap when you don't own the leading brand in your core market. Intel is so important that we've prepared a premium report on the company, replete with a year's worth of updates to our analysis. Just click here to dig into this valuable resource.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel and NVIDIA. Motley Fool newsletter services have recommended writing puts on NVIDIA. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (2)

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  • Report this Comment On August 07, 2012, at 1:14 PM, rsinj wrote:

    The convertibility of the current bonds is entirely a nonissue considering the conversion prices were $20 and $28 per share for the 5.75% and 6% respectively.

    The high rates being paid by AMD is specifically because their credit rating is poor and investors need to be paid for their risk in purchasing these bonds.

    Saying that the 7% is good in that it removed some of the potential for dilution is silly. Anyone seeing AMD trading at above the $28 level for conversion on the 6% notes? I doubt it.

    The debt is nearing maturity and they don't have the cash to pay it. The stock is in the pits so an equity offering can't be done. So they'll pay probably double what an A rated company would in this environment.

    As far as raising it to $500 million because of the good response - AMD will have the last laugh in a few years when they default on them. Hey, the Facebook offering was raised too as a result of "good response".

  • Report this Comment On August 07, 2012, at 1:21 PM, constructive wrote:

    Yeah, not seeing how raising money at a higher rate is good news.

    If they had their act together they could have sold equity or convertibles when the stock was over $7, instead they are stuck issuing junk bonds since the stock is around $4.

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