Approximately EUR3.8 billion senior debt affected
Frankfurt am Main, July 23, 2012 -- Moody's Investors Service has today downgraded the long-term
senior unsecured ratings, the corporate family rating (CFR) and
the probability of default rating (PDR) of Nokia Oyj ("Nokia"
or "the group") to Ba3 from Ba1. The short-term
senior unsecured ratings of Not-Prime were affirmed. The
outlook on all ratings remains negative.
RATINGS RATIONALE
"Today's rating action reflects our view that Nokia's
transition in the smartphone business will cause deeper operating losses
and consequently cash consumption in the coming quarters than we had previously
assumed," says Wolfgang Draack, a Moody's Senior
Vice President and lead analyst for Nokia. "A return to profitability
in the Devices & Services (D&S) segment on the back of smartphones
with the Windows Phone 8 mobile operating systems is by no means assured,"
Mr Draack continues.
Nokia reported a 9.1% negative non-IFRS operating
margin for the Devices & Services (D&S) segment in Q2, which
was far worse than the -5.0% with an improving trend
in H2 that we had factored into the Ba1 rating. The Q2 operating
margin includes inventory-related write-offs of about 550
b.p., but according to management the margin may not
materially improve in Q3. Moody's thinks this may not even
be the weakest period of the product transition and estimates that discounts
and inventory-related obsolescence even for the relatively new
Lumia range of devices led to an operating loss of more than EUR500 million
in the Smart Devices segment. At around 16% gross profit
margin, the new Lumia devices are loss-making at operating
level at this time. In view of a very price competitive and fast
moving smartphone industry, Moody's expects that the next,
Windows Phone 8-based smartphone generation will find it challenging
to achieve a level of differentiation and market penetration to become
a meaningful income generator in the first few quarters after launch.
If the devices are launched and first units shipped in Q4 2012 and find
immediate traction, it might still take until mid-2013,
before volumes and margins reach a level of sustainable profitability.
Given further rather modest profitability in the Mobile Phone business
and at Nokia Siemens Networks, Moody's now expect a return
to profitability only in the second half 2013. Such a long period
of operating losses, though backed by strong liquidity and the expectation
of an eventual turnaround is more commensurate with a Ba3 rating.
The Nokia group has achieved a positive cash flow before dividends in
the second quarter, but that was boosted by EUR400 million prepayments
on intellectual property and EUR120 million contribution from Nokia Siemens
Networks, whose cash flow, however, is likely to be
negative in H2, 2012 due to restructuring costs. We estimate
that funds from operations in the core business have not materially improved
in Q2 and will deteriorate further due to aggressive pricing, cash
cost of restructuring and launch cost for the new devices. In Q2,
Nokia has been able to compensate cash consumption in operations by cash
inflows from monetization of intellectual property and platform payments
from Microsoft. Moody's expects management to keep up these
efforts but with diminishing proceeds, so that Nokia's strong
balance of net cash will gradually erode.
Moody's notes that Nokia has maintained a strong liquidity position
and capital structure. At the end of June 2012, Nokia,
including 100% of the Nokia Siemens Networks (NSN) communications
equipment partnership with Siemens (Aa3 stable), had approximately
EUR9.4 billion of cash and marketable securities, more than
twice its reported financial debt. Nokia ended the second quarter
of 2012 with EUR4.2 billion of net cash, down from EUR4.9
billion three months before, after paying EUR0.7 billion
of dividends to shareholders. For its liquidity needs, Nokia
also has a reliable EUR1.5 billion revolving credit facility due
in 2016, which does not contain financial covenants. Yet,
in Moody's view a very strong cash position cannot offset operating
challenges and losses in the core business for an extended period of time.
The negative outlook on Nokia's Ba3 ratings reflect the low visibility
with regard to (i) the trend for Nokia's market share in smartphones
and whether the Windows-based devices can attain a solid market
share with positive income contribution to Nokia; (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 if (i) Windows devices make meaningful
gains in the smartphone market and achieve a positive margin; (ii)
Nokia's revenues start to grow again and it achieves a clear positive
non-IFRS operating margin as reported by Nokia (-4.0%
for the first half 2012, as adjusted by Moody's); and
(iii) the group maintains a comfortable adjusted net cash position (approximately
EUR1.8 billion as per the end of June 2012, 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 margin contribution
of the Mobile Phones segment advances to the high single digits in percentage
terms (4.5% in H1/2012); and (iii) the group's
cash consumption falls to marginal levels.
Moody's would consider downgrading Nokia's rating further
if there is evidence that the Lumia product family is failing to gain
a robust market share or is not trending towards profitability; or
if Nokia's cash consumption accumulates over the coming quarters
such that the group's reported level of net cash approaches EUR1.5
billion (EUR4.2 billion at end of June 2012). The rating
anticipates a very weak Q3 in terms of profitability, but general
improvement thereafter.
AFFECTED RATINGS
Issuer: Nokia Oyj
Downgrades:
- Senior unsecured regular bond/debenture, downgraded to
Ba3, LGD4 (59%) from Ba1, LGD4 (63%),
- Corporate family rating, downgraded to Ba3 from Ba1
- Probability of default rating, downgraded to Ba3 from Ba1
- Senior unsecured medium-term note programme, downgraded
to (P)Ba3, LGD4 (59%) (P)NP, from (P)Ba1, LGD4
(63%), (P)NP
Affirmation:
- Senior unsecured commercial paper, at NP
Issuer: Nokia Finance International B.V.
Affirmation:
- Senior unsecured commercial paper, at NP
PRINCIPAL METHODOLOGY
The methodologies used in these ratings were Global Communications Equipment
Industry published in June 2008, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009. Please see the Credit Policy page
on www.moodys.com for a copy of these methodologies.
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 the first six months 2012 amounted
to approximately EUR14.9 billion.
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
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Matthias Hellstern
Managing Director
Corporate Finance Group
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Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
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Germany
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Moody's downgrades Nokia to Ba3/NP; outlook negative
