Investors should swap into Advanced Micro Devices' 6% convertibles: Barclays Capital analysts

By Rebecca Melvin

New York, Nov. 18 - Following Advanced Micro Devices Inc.'s moves over the last week, Barclays Capital convertibles analysts recommend investors swap out of the company's 5.75% convertibles and into the 6% convertibles due 2015, according to research published Wednesday.

The recommendation was driven by Barclays Capital's continued comfort with AMD's credit and fundamentals, continued potential for buybacks and the longer duration and delta relative to the 5.75% convertibles.

AMD's credit profile has "transformed completely over the last week as a result of the $1.25 billion settlement of its litigation against Intel, signing of a new cross license agreement with Intel, and its tender offer for its 5.75% convertible notes and 7.75% senior notes," analysts Venu Krishna and Kannan Venkateshwar wrote.

The moves boil down to two major factors: a concrete path to deconsolidation of Global Foundries and improved leverage and liquidity position, they said.

With the new cross license agreement with Intel, AMD can now achieve a true deconsolidation of Global Foundries. Most of the $800 million cash burn in 2010 estimated by Barclays Capital analysts at the consolidated entity is due to capital expenditures at Global Foundries.

AMD will have $1.86 billion in cash and about $2.8 billion in debt after the recently announced transactions are completed, the Barclays analysts estimated.

In the past, the company has said it is comfortable with a cash balance of about $1 billion and therefore the excess cash after these transactions will be about $860 million.

"In our opinion, the company could use the excess liquidity to continue to buy back the 6% notes in the market. Assuming the company uses this excess cash for debt reduction, the company will be left with a net debt of about $1 billion, which should reduce further as the company moves into positive cash flow territory at the product company level next year," the analysts wrote.

Going forward, they expect the company to amend its guarantee agreement for the Fab 36 debt as a precursor to a complete spinoff.

"In our opinion, the tender for the 7.75s should also help this cause given that Global Foundries is at present classified as a restricted subsidiary under the 7.75% indenture. Based on recent developments, we expect the spinoff timeline to be sooner rather than later," the analysts wrote.

In an earlier note, Barclays recommended going long the 5.75% convertibles due 2012 based on its solid credit and an expectation of a steepening in AMD's term structure from a relatively flat term structure. Recent developments have accelerated the term steepening from about 85 basis points in September to about 250 bps, the analysts wrote.

Sunnyvale, Calif.-based AMD is a computer technology company.

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