March 1, 2018

AMD Valens Credit Analysis – Rating Agencies and Credit Markets Continue to Disregard AMD’s Healthy Liquidity Profile, R&D Flexibility, and Robust Recovery Rate

  • CDS markets are overstating AMD’s credit risk with a CDS of 188bps relative to an Intrinsic CDS of 91bps, while cash bond markets are materially overstating credit risk with a YTW of 5.736% relative to an Intrinsic YTW of 3.696%. Furthermore, Moody’s is grossly overstating the firm’s fundamental credit risk, with their B3 credit rating eleven notches lower than Valens IG3+ (A1) credit rating.
  • Incentives Dictate Behavior™ analysis highlights that AMD’s management compensation framework is favorable for credit holders, as it aligns management to expand margins and grow the overall business in an asset efficient manner, which should lead to higher Uniform ROA levels and increased cash flows available for servicing obligations. Additionally, management members are material holders of AMD equity relative to their average annual compensation, indicating they should be well aligned with shareholders for long-term value creation
  • AMD’s UAFRS-based P/B of 2.5x is high relative to historical valuations, indicating that equity markets are more bullish than credit markets, limiting the potential for fundamental-based equity upside. Additionally, should the company disappoint relative to aggressive market expectations, there could be room for equity downside
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