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Gaming wins boosting AMD

Rise in bonds gives chipmaker new confidence

Advanced Micro Devices Inc. is beating Intel Corp. in the bond market as it wins slots for its semiconductors in game consoles, ceding the shrinking market for personal computers to its larger rival.

Since Feb. 1, when Bloomberg News reported AMD chips would be used in the next generation of Sony Corp.’s PlayStation devices, its bonds have risen 16.7 percent, more than five times the gain for Intel Corp., according to Bank of America Merrill Lynch index data. Microsoft Corp. also plans to use AMD for the next version of its Xbox, Bloomberg said last month.

While Sunnyvale, Calif.-based AMD has been marginalized in PC chips over the past decade as Intel’s processors proliferated to command a more than 80 percent share, AMD is seeking avenues for growth by designing semiconductors that combine processing and graphics functions for new markets. After burning through cash in 10 of its past 12 years, AMD is winning over bondholders by powering consoles for games such as “Call of Duty: Black Ops 2” and “Grand Theft Auto IV.”

“Being in a market with Intel, you just can’t produce knockoffs,” Jason Pompeii, a Fitch Ratings analyst in Chicago, said in a telephone interview. “They needed to diversify their revenue base, and they’re now winning some of those designs, which gives them an opportunity to sell their chips.”

Intel, founded a year before AMD in 1968, is using its resources to push into mobile devices.

“We’re looking forward to the second half of the year in terms of getting free cash flow generation and profitability.” Devinder Kumar, AMD’s chief financial officer, said in a telephone interview. “We are in a turnaround.”

AMD announced a 15 percent staff cut on Oct. 18, trimming about 1,770 jobs as it offered a fourth-quarter sales outlook that was below market forecasts. The company revised the reductions to 14 percent, according to Michael Silverman, an AMD spokesman. It will lose $252.3 million this year and $21 million in 2014, according to 19 analysts surveyed by Bloomberg. It had a $1.18 billion deficit in 2012.

After the announcement, AMD’s $500 million in 7.75 percent debt due August 2020 fell as low as 80.75 cents on the dollar to yield 11.59 percent on Nov. 16, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority, down from 104 cents Oct. 1. The notes recovered to 102 cents to yield 7.39 percent Thursday in New York.

“The market definitely overreacted,” Andy Li, an analyst at New York-based bond research firm CreditSights Inc., said in a telephone interview. “It was largely due to a liquidity fear.”

AMD’s shares also bottomed on Nov. 16, ending that day at $1.86, and have since risen to $3.56.

Standard & Poor’s cut the company’s bond rating in January to B, five levels below investment grade from BB-, citing “continued revenue and earnings declines.” Moody’s reduced its grade to an equivalent B2 that month.

Intel is rated an investment-grade A1 by Moody’s and a corresponding A+ at S&P.

AMD’s average yield to maturity is 7.61 percent while Intel’s is 2.42 percent, according to Bank of America Merrill Lynch Index data.

The yield differential between AMD’s $500 million of 7.5 percent notes due August 2022 and Intel’s $1.5 billion of 2.7 percent securities maturing in December 2022 decreased 273 basis points to 512.2 basis points this year, according to data compiled by Bloomberg. That’s the narrowest since the Intel bonds were sold in December.

Providing chips for game consoles is part of Chief Executive Officer Rory Read’s aim to get more than 20 percent of AMD’s revenue from areas other than PCs by the fourth quarter, up from about 10 percent now, Kumar said.

“The deals show that Microsoft and Sony have high regard for AMD’s product.” David Novosel of debt researcher Gimme Credit said in a telephone interview from Chicago. “It’s a confidence boost.”

While AMD seeks growth in game consoles, Intel aims for mobile technology.

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