Approximately EUR3.6 billion senior debt affected
Frankfurt am Main, June 15, 2012 -- Moody's Investors Service has today downgraded the long-term
senior unsecured ratings of Nokia Oyj ("Nokia" or "the
group") to Ba1 from Baa3 and its short-term senior unsecured
ratings to Not-Prime from Prime-3. Concurrently,
Moody's has assigned a Ba1 corporate family rating (CFR) and a probability
of default rating (PDR) to the company. The outlook on all ratings
remains negative.
RATINGS RATIONALE
"Today's rating action reflects our view that Nokia's
far-reaching restructuring plan -- which involves
drastically downsizing its infrastructure by focusing its direct marketing
on fewer markets, streamlining support functions and reducing investments
in certain R&D projects in order to realize additional fixed cost
savings of up to EUR1.3 billion by the end of 2013 --
delineates a scale of earnings pressure and cash consumption that is larger
than we had previously assumed," says Wolfgang Draack,
a Moody's Senior Vice President and lead analyst for Nokia.
Despite today's downgrade, Moody's regards Nokia's
commitment to decisive restructuring as positive and necessary to return
the group to profitability. A return to profitability also depends
on Nokia successfully transitioning its range of smartphones to the new
Windows operating system and stabilising its feature phone business.
On Thursday 14 June, Nokia announced its intention to continue investing
in its priority businesses, but also to downsize ancillary activities
to better align its fixed cost in Devices & Services (D&S) to
lower revenues. Management is seeking to reduce operating expenses
by approximately 44% by the end of 2013 from the 2010 level.
This compares with revenues in the segment that fell to EUR21.1
billion for the last twelve months from EUR29.1 billion which represents
a 28% decline, with revenue growth not yet in sight.
Nokia estimates that its two restructuring plans announced to date have
a cumulative cash cost of EUR1.7 billion of which EUR450 million
has already been paid out by the end of Q1/2012. However,
Moody's cautions that, if Nokia's revenues do not stabilise
soon, it may need to carry out additional restructuring.
For Nokia to return to growth in this segment, it will primarily
require the Lumia smartphones, which are selling in several versions
and many markets, to gain traction in the smartphone market.
Indeed, in Moody's view, the attractiveness of the Lumia
range should be boosted by the introduction of the Windows 8 operating
system for mobile devices, to be launched in the second half of
2012. The recently launched Asha full touch-screen model
should support demand for feature phones and raise average selling prices,
although Nokia may sell fewer units of mobile phones as the distribution
networks are being scaled down and the overall feature phone market continues
to decline as customers migrate to smartphones with lower price points.
Moody's now expects Nokia's non-International Financial
Reporting Standards (IFRS) operating margins in its Devices & Services
segment to fall to the negative mid-single digits in percentage
terms (from -3% assumed so far) in the next one or two quarters,
with material improvement starting in the second half of 2012 driven by
rising sales of the group's new Lumia smartphone range and realised
cost savings. Nokia's high gross and net cash balances should
remain strong during its product transition to Windows-based devices,
with the group's net reported cash likely to remain above EUR3.0
billion.
Moody's notes that Nokia has maintained a strong liquidity position
and capital structure. At the end of March 2012, Nokia,
including 100% of the Nokia Siemens Networks (NSN) communications
equipment partnership with Siemens (Aa3 stable), had approximately
EUR9.8 billion of cash and marketable securities, around
twice its reported financial debt. Nokia ended the first quarter
of 2012 with EUR4.9 billion of net cash. For its liquidity
needs, Nokia also has a reliable EUR1.5 billion revolving
credit facility due in 2016, which does not contain financial covenants.
In addition to the pressure on its own operations, Moody's
notes that Nokia may have to contribute additional capital or funding
to NSN if the company's restructuring costs start to exceed its
cash flow from operations.
STRUCTURAL CONSIDERATIONS
In its Loss Given Default (LGD) approach, Moody's decided
not to rate the structurally preferred operating liabilities of subsidiaries
above Nokia's debt instruments. The senior unsecured debt
of Nokia was rated at the level of the CFR, instead of a notch below,
because of (i) the investment-grade nature of Nokia's financing
structure, with virtually all financial debt raised by the parent
company on a pari-passu, senior unsecured basis; (ii)
Moody's assumption that more than half of the group's liquidity,
balances of cash and equivalents are unencumbered and directly accessible
by Nokia Oyj without delay; and (iii) the fact that the majority
of intellectual property rights are held, and more than 40%
of group revenues are recorded, by the parent company, which
itself has only small amounts of external assets, however.
If cash held at, and directly accessible by, the parent company
declines materially below Nokia's financial debt, Moody's
may differentiate its rating of Nokia's senior debt instruments
from the CFR.
The negative outlook on Nokia's Ba1 ratings reflect the low visibility
with regard to (i) the trend for Nokia's market share in smartphones
and whether there is customer acceptance of the Lumia range of devices;
(ii) demand and margin potential for the group's feature phones
in emerging markets; and (iii) Nokia's future net cash flows,
which are adversely affected by pricing pressure, marketing incentives
and restructuring expenditures, although this is partially mitigated
by royalty collections, platform payments from Microsoft and potential
disposal proceeds.
WHAT COULD CHANGE THE RATING UP/DOWN
Given that the rating outlook is negative, there is currently limited
potential for an upgrade of Nokia's ratings. However,
Moody's could upgrade the rating to investment grade if (i) Windows
devices make meaningful gains in the smartphone market; (ii) Nokia's
revenues start to grow again and it achieves an operating margin (-4.0%
for the last 12 months to March 2012, as adjusted by Moody's)
in the mid-single digits in percentage terms; and (iii) the
group maintains an adjusted net cash position (approximately EUR2.4
billion as per the end of March 2011, as adjusted by Moody's).
Moody's would stabilise Nokia's outlook if (i) the Lumia family
of devices gains meaningful market share and the Smart Devices segment
returns to non-IFRS operating profit; (ii) the sales volumes
of Mobile Phones segment at least stabilises and its margin contribution
returns to the double digits in percentage terms; and (iii) the group's
cash consumption falls to marginal levels.
Moody's would consider downgrading Nokia's rating further
if (i) there is evidence that the Lumia product family is failing to gain
momentum, due, for instance, to a slowdown in customer
take-up; (ii) the non-IFRS operating margin of the
group's Devices & Services segment declines further below -5%
and fails to improve in the second half of 2012; or (iii) Nokia's
cash consumption remains high, and is not materially reduced over
the coming quarters such that the group's reported level of net
cash does not trend below EUR3.0 billion (EUR4.9 billion
at end of March 2012). The bulk of this cash consumption will be
accounted for by EUR740 million of dividends paid in the second quarter
of 2012 and restructuring cash costs at both Nokia and NSN.
AFFECTED RATINGS
Downgrades:
..Issuer: Nokia Finance International B.V.
....US$4000M Senior Unsecured Commercial
Paper, Downgraded to NP from P-3
..Issuer: Nokia Oyj
.... Issuer Rating, Downgraded to Ba1
from Baa3
....US$4000M Senior Unsecured Commercial
Paper, Downgraded to NP from P-3
....US$4000M Senior Unsecured Commercial
Paper, Downgraded to NP from P-3
....EUR5000M Senior Unsecured Medium-Term
Note Program, Downgraded to (P)NP from (P)P-3
....EUR5000M Senior Unsecured Medium-Term
Note Program, Downgraded to (P)Ba1 from (P)Baa3
....US$1000M 5.375% Senior
Unsecured Regular Bond/Debenture May 15, 2019, Downgraded
to Ba1 from Baa3
....US$500M 6.625% Senior
Unsecured Regular Bond/Debenture May 15, 2039, Downgraded
to Ba1 from Baa3
....EUR1250M 5.5% Senior Unsecured
Regular Bond/Debenture Feb 4, 2014, Downgraded to Ba1 from
Baa3
....EUR500M 6.75% Senior Unsecured
Regular Bond/Debenture Feb 4, 2019, Downgraded to Ba1 from
Baa3
Assignments:
..Issuer: Nokia Oyj
.... Probability of Default Rating,
Assigned Ba1
.... Corporate Family Rating, Assigned
Ba1
....US$1000M 5.375% Senior
Unsecured Regular Bond/Debenture May 15, 2019, Assigned a
range of LGD4, 63 %
....US$500M 6.625% Senior
Unsecured Regular Bond/Debenture May 15, 2039, Assigned a
range of LGD4, 63 %
....EUR1250M 5.5% Senior Unsecured
Regular Bond/Debenture Feb 4, 2014, Assigned a range of LGD4,
63 %
....EUR500M 6.75% Senior Unsecured
Regular Bond/Debenture Feb 4, 2019, Assigned a range of LGD4,
63 %
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Global Communications
Equipment Industry published in June 2008. Please see the Credit
Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Espoo, Finland, Nokia Oyj is a large manufacturer
of mobile communication devices and a leading supplier of telecommunication
network systems. Its net sales in 2011 amounted to approximately
EUR38.7 billion and to EUR7.4 billion in the first quarter
of 2012.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
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this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
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Wolfgang Draack
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
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Matthias Hellstern
Associate Managing Director
Corporate Finance Group
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Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
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Moody's downgrades Nokia to Ba1/NP; outlook negative
