Will AMD Drown in Debt Again?

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Investors aren't cutting Advanced Micro Devices (NYS: AMD) any slack at all.

Shares of the plucky processor designer have plunged 40% over the last year and 52% from 52-week highs set in March. A crummy second-quarter report didn't exactly soothe investor nerves, and Intel (NAS: INTC) is putting the hammer down with dominant sales of its new Ivy Bridge chips.

All of this boils down to an appropriate reaction to AMD's deteriorating business prospects. Fair enough. But today, the market reaction to AMD's moves is getting slightly ridiculous.


The company just announced that it's selling $300 million in senior unsecured bonds. With no other AMD news of note today, that was enough to send shares down again on a generally buoyant market day.

And this time, it's not fair.

Traders might recall the bad old days when AMD was drowning in debt, and pull their "sell" triggers on fears that the same ugly beast is rearing its head again. But that's just not what's happening here.

The announcement's boilerplate text includes the standard cop-out line about "general corporate purposes and working capital," and says that the proceeds might be used for "potential strategic transactions." That's a potentially juicy line of reasoning given the rumored takeover of chip technologist MIPS Technologies (NAS: MIPS) . MIPS reports earnings later this week and it's not unusual for buyout announcements to be paired with quarterly reports. AMD's financing would seem to throw nitroglycerin on the takeover fires, then.

However, MIPS shares are also down today. If anyone expects AMD to use these bonds for a buyout here, those market makers must be disappointed in AMD's small dip into the financing bucket.

But the main purpose here is a simple refinancing. You know, like rolling over your seven-year ARM mortgage into a fixed loan at more attractive rates.

AMD has some $485 million of convertible debt coming due this month, listed at a 5.75% annual interest rate. It's high time to refinance this loan, lest the debt converts into a dilutive batch of common stock certificates. AMD's balance sheet is fairly balanced today, with cash equivalents lagging the long-term debt overhang by just 22%. It looks like AMD is planning to use some cash to repay the expiring debt, replacing only a portion of it with new bonds.

I don't think that's much of a cause for concern. If you're selling AMD at today's multi-year lows, you should be more worried about the long-term viability of its strategy. Standard & Poor's gives the new notes a BB- rating with a negative outlook, while Moody's assigns a junk-grade ba3 rating but a stable outlook.

S&P's thinking reflects my own concerns: "The outlook is negative, reflecting decreasing near-term operating performance and increased leverage. A downgrade could result from a number of developments, including protracted lower demand, erosion of market share, or weaker manufacturing execution."

Valid worries, all. Learn all about the cutthroat chip market in our new premium report on Intel. To make sure that you don't get caught flat-footed by the next weird market turn, the report even includes a full year of up-to-the-minute updates and analysis. Click here to get started.

The article Will AMD Drown in Debt Again? originally appeared on Fool.com.

Fool contributorAnders Bylundholds no position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Intel.Motley Fool newsletter serviceshave recommended buying shares of Intel and Moody's. The Motley Fool has adisclosure 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 servicesfree for 30 days.

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