April 30, 2019

AMD Valens Credit Analysis – CDS 93bps, Base Case iCDS 66bps, Negative Case iCDS 126bps, 2024 7.000% Bond YTW of 3.119%, iYTW of 3.079%, Ba3 Rating from Moody’s, IG3+ (equivalent to A1) Rating from Valens, Low Refinancing Need

  • Credit markets are accurately stating credit risk with a CDS of 93bps and a YTW of 3.119%, relative to an Intrinsic CDS of 66bps and an Intrinsic YTW of 3.079%. However, Moody’s is grossly overstating the firm’s fundamental credit risk, with their Ba3 credit rating eight notches lower than Valens IG3+ (A1) credit rating
  • AMD’s compensation metrics should drive management to focus on improving all three value drivers: top-line growth, margins, and asset utilization, which would lead to Uniform ROA expansion and increased cash flows available to servicing debt obligations. Furthermore, most members of management hold material AMD equity relative to their annual compensation, aligning them with shareholders for long-term value creation. That said, apart from CEO Su, management is well compensated in a change-in-control scenario, indicating they may be incentivized to pursue a sale or accept a takeover, elevating event risk for credit holders, though she may influence them to do otherwise
  • Earnings Call Forensics™ of the firm’s Q4 2018 earnings call (1/29) highlights that management may be concerned about competitive pricing pressures and projected declines in revenue. In addition, they may be exaggerating cloud adoption rates, the strength of their higher-margin portfolio mix, and overlap between their development cycle and their customers’ development cycles. Moreover, they may be concerned about the performance and total cost of ownership of Rome processors, and their business segmentation
  • AMD currently trades near corporate averages relative to UAFRS-based (Uniform) Earnings, with a 21.0x Uniform P/E. At these levels, the market is pricing in expectations for Uniform ROA to decline from 20% in 2018 to 18% through 2023, accompanied by 10% Uniform Asset growth going forward.
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