Wachovia analysts say avoid AMD now, say old 4.75s look cheaper than new 4.5s

By Ronda Fears

Nashville, Nov. 20 - Wachovia Securities, Inc. convertible analysts advise avoiding Advanced Micro Devices Inc. right now as they see the credit deteriorating further.

But for those who want exposure to the chip sector via AMD, they note the old 4.75% convertibles are more attractive than the new 4.5% issue.

"We recommend that investors avoid this name at this time," said analysts Henry Voskoboynik and Dmitry Melnick in a report Wednesday.

"We believe AMD's credit will continue to deteriorate over the next three quarters."

AMD priced an upsized $350 million of five-year convertible senior notes at par to yield 4.5% with a 32% initial conversion premium - with more aggressive terms than guidance that had been tightened once before pricing the quick-sale deal.

Amid the overnight marketing effort, Standard & Poor's downgraded AMD's corporate credit rating by one notch to B- and rated the new notes at CCC.

Valuations on the new deal, indicating a wide variation of views on AMD's credit spread, put it at anywhere from around fair value to almost 10% cheap.

The deal "buys another three quarters of liquidity," the Wachovia analysts said, but AMD's old converts look more attractive than the new one.

At 103 bid, 103.75 asked, the analysts said the new issue is 3% to 3.75% rich, using an implied credit spread of 1,200 basis points over Treasuries and 60% volatility.

Therefore, if investors want exposure to AMD they recommend looking at the old 4.75% converts.

As of Tuesday, the analysts said, the AMD 4.75% convertible was 7.58% cheap using a credit spread of 1,200 basis points and 60% volatility.

"We believe AMD has the potential to be a home run," the analysts said.

"However, over the next six months it will likely tread water as the company goes through a painful restructuring."

The analysts expect AMD to burn $145 million in cash from operations over the next three quarters, including a $100 million cash charge for restructuring, and spend $485 million in capex, taking total cash down to around $560 million, including $400 million from the convert offering.

AMD expects to have a working Hammer family chip, addressing the server market, the analysts noted, but every 90-day delay in product introduction will cost the company close to $100 million of cash.

If there are no further delays in the Hammer chip introduction, sampling, marketing and manufacturing, AMD will generate close to $130 million in cash flow from operations in fourth quarter of fiscal 2003 and negative free cash flow of only $20 million, according to the analysts.

"If Hammer is as good in reality as it looks on paper, AMD will enjoy at least several profitable years," the analysts said.

"If Hammer does not work, bondholders will suffer, but are not likely to get wiped out. AMD has a large ($1 billion annual sales) flash memory business it may have to part with, if Hammer does not work, that can generate in excess of $1.5 billion in liquidity for the company."

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