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I AGREE
14 Oct 2016
London, 14 October 2016 -- Moody's Investors Service ("Moody's") has today
downgraded to Baa2 from Baa1 the senior unsecured debt ratings and to
(P)Baa2 from (P)Baa1 the MTN program rating of Telefonaktiebolaget LM
Ericsson ("Ericsson"). At the same time, the
agency has placed the company's Baa2/(P)Baa2 ratings on review for
further downgrade. Moody's expects to conclude the review within
a maximum timeframe of three months.
"The ratings downgrade to Baa2 reflects the continuation and acceleration
of Ericsson's sales and earnings decline, evident in the company's
preliminary Q3 2016 results, which we expect will persist into 2017,
leading to credit metrics that are no longer commensurate with the previous
Baa1 rating" says Alejandro Núñez, a Moody's
Vice President -- Senior Analyst and lead analyst for Ericsson.
"The ratings remain on review for further downgrade. The
review process will focus on (1) the extent of and possible mitigants
to Ericsson's negative free cash flow generation over the next twelve
to eighteen months; (2) the assessment of how the company's
financial policies (including its dividend policy) may evolve as Ericsson
adjusts to a reduced sales environment; (3) clarity on Ericsson's
management structure and any potential changes in operating strategy;
and (4) the management of its liquidity position in light of the expected
cash burn," adds Mr. Núñez.
RATINGS RATIONALE
The ratings downgrade and the review for downgrade principally reflect
the continued decline in Ericsson's operating performance and markets
outlook as announced by the company in its preliminary Q3 2016 results
release.
Ericsson reported a year-over-year revenue decline of 14%
(of which Networks comprised a 19% yoy decline on a reported basis),
a drop in its gross margin to 28% from 34% yoy and quarterly
operating income of only SEK300 million (compared with SEK5.1 billion
in Q3 2015). The underlying drivers of the revenue and earnings
declines included continued macroeconomic weakness in key emerging markets
such as Brazil, Russia and the Middle East as well as reduced Networks
coverage and capacity sales in Europe as multi-year mobile broadband
projects such as Vodafone's Project Spring were completed.
In addition, Ericsson's management now forecast a continuation
of these weak operating trends over the next two to three quarters.
The announcements made at the company's preliminary Q3 results indicate
that revenue growth and operating income for the year ending 31 December
2016 will be markedly lower compared with management's and Moody's
previous expectations. Moody's notes that Ericsson's
ratings were already weakly positioned at the Baa1 level prior to today's
rating actions.
Following the company's Q3 preliminary results, Moody's
now anticipates sustained revenue decline for Ericsson in FY16 (contrasted
with +8% reported growth in FY15), with material operating
margin compression and negative free cash flow generation for a second
consecutive year.
Nevertheless, Moody's continues to view the company's
position as a global leading telecoms equipment vendor and its good liquidity
position as supportive credit factors although the rating agency notes
that its declining operating cash flow and restructuring charges are likely
to continue to erode Ericsson's cash pile over the coming year.
The company has embarked on a cost efficiencies program, which aims
to save a net SEK9 billion of costs compared to FY14. In addition,
it has increased its operating expense savings target to reach an opex
base of SEK 53 billion by H2 2017. Although Ericsson may be in
a position to achieve a material portion of these savings by year-end
2017, the targeted savings measures, including headcount reductions,
will take time to effect.
The Baa2 rating reflects: (1) the company's weaker revenue
and earnings growth outlook for FY16 and FY17, particularly in the
Networks division, which continues to be impacted by softening end
market demand and intense competition; (2) the lack of sufficient
offsetting growth or earnings contribution from the Global Services division;
balanced against (3) Moody's expectations that most, if not all,
of the company's cost savings initiatives are delivered by year-end
2017; (4) a maintenance of the company's good liquidity position;
and, (5) financial policies within the limits of the company's
free cash flow generation and liquidity resources.
WHAT COULD CHANGE THE RATING UP/DOWN
Prior to the downgrade to Baa2 and the review process, Moody's had
indicated that Ericsson's ratings could be downgraded if:
(1) the group were to continue exhibiting a sustained erosion in the company's
market positions; (2) operating margins remained in single-digit
territory; (3) leverage were sustained above 1.75x; or
(4) RCF/gross debt (Moody's-adjusted) remained below 20%.
The review process will focus on (1) the extent of and possible mitigants
to Ericsson's negative free cash flow generation over the next twelve
to eighteen months; (2) the assessment of how the company's
financial policies (including its dividend policy) may evolve as Ericsson
adjusts to a reduced sales environment; (3) clarity on Ericsson's
management structure and any potential changes in operating strategy;
and (4) the management of its liquidity position in light of the expected
cash burn.
LIST OF AFFECTED RATINGS
Downgrades:
..Issuer: Telefonaktiebolaget LM Ericsson
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Baa2 from (P)Baa1; Placed Under Review
for further Downgrade
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa2 from Baa1; Placed Under Review for further Downgrade
Outlook Actions:
..Issuer: Telefonaktiebolaget LM Ericsson
....Outlook, Changed To Rating Under
Review From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Diversified Technology
Rating Methodology published in December 2015. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
With revenues of SEK246.9 billion in FY2015, Telefonaktiebolaget
LM Ericsson ("Ericsson") is a world-leading provider
of telecommunications equipment and related services to mobile and fixed
network operators globally. Its equipment is used by over 1,000
networks in more than 180 countries and around 40% of the global
mobile traffic passes through its systems. Networks represented
50%, Support Solutions 6% and Global Services 44%
of group revenues in FY2015. The company's largest shareholders
are Investor AB (Aa3 stable) and AB Industrivärden (unrated),
with voting rights of 21.5% and 15.2%,
respectively.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
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 certain regulatory disclosures in relation
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each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain 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 have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
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rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Alejandro Nunez
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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Ivan Palacios
Associate Managing Director
Corporate Finance Group
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Releasing Office:
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