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I AGREE
07 Apr 2011
Approximately EUR5.3 billion senior debt affected
Frankfurt am Main, April 07, 2011 -- Moody's Investors Service has today downgraded Nokia Oyj's
(Nokia) senior ratings to A3 from A2 and its short-term debt ratings
to Prime-2 from Prime-1 with a negative outlook.
This action concludes the rating review initiated by Moody's on
28 January 2011.
Downgrades:
..Issuer: Nokia Oyj
.... Issuer Rating, Downgraded to A3
from A2
....Senior Unsecured Commercial Paper,
Downgraded to P-2 from P-1
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)P-2, (P)A3 from (P)P-1,
(P)A2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A3 from A2
..Issuer: Nokia Finance International B.V.
....Senior Unsecured Commercial Paper,
Downgraded to P-2 from P-1
Outlook Actions:
..Issuer: Nokia Oyj
....Outlook, Changed To Negative From
Rating Under Review
..Issuer: Nokia Finance International B.V.
....Outlook, Changed To Negative From
Rating Under Review
RATINGS RATIONALE
"The rating downgrade primarily reflects Nokia's weakened
market position in its core business, mobile devices, which
has reduced the company's margins and funds from operations,"
says Wolfgang Draack, a Moody's Senior Vice President and
lead analyst for Nokia. "In Moody's view, the
main reasons for this trend are: (i) an inflexible smartphone operating
system; (ii) slow time-to-market for new models;
(iii) more attractive innovation by smartphone competitors; and (iv)
accelerating price competition for low-end phones,"
adds Mr Draack. Throughout 2010, Nokia maintained relatively
robust free cash flow. Nokia also has a strong capital structure
and liquidity position. Group metrics are diluted by 50%-owned
Nokia Siemens Networks (NSN), which is fully consolidated,
while risks and returns are shared with Siemens AG (A1, stable).
Under the direction of a new CEO, Nokia's management is currently
addressing the company's operating challenges and strategic position.
Main change announced by Nokia to date is its partnership with Microsoft
(Aaa, stable) to migrate its smartphone range from Nokia's
Symbian to the Microsoft Windows Phone operating system. By establishing
and promoting a third mobile communication ecosystem next to Google's
Android operating system and Apple's iOS platform, the partners
expect to: (i) develop an attractive range of hardware with innovative
software and unique services for consumers; (ii) establish a compelling
alternative for operators; and (iii) make it easier for developers
to build applications with a global reach.
The partnership combines (i) Nokia's established brand, the
high sales of its diverse product line-up of mobile devices,
its global distribution network and broad service offering (including
the assets of NAVTEQ) with (ii) Microsoft's extensive experience
in software development and with a large community of developers.
In Moody's view, these factors provide the partners with a
good opportunity to gradually re-build market share in smartphones
after the transition while sharing the execution risks of product development
and customer acceptance. The cost savings from a more focused research
and development (R&D) programme and other streamlining as well as
sales and marketing support contributed by Microsoft could mitigate the
pressure on Nokia's margins as a result of smartphone royalty payments
due Microsoft in future and a more even and competitive market structure
after the re-positioning.
In the short term, however, Moody's expects a significant
degree of uncertainty about the financial impact on Nokia of the transition
and about the level of eventual acceptance of the Windows Phone device
offering. Although there is a risk of a material disruption to
Nokia's sales volumes, Moody's has not downgraded the
ratings further than A3, because (i) Nokia still has a large mobile
phone business, which the rating agency expects to be relatively
resilient to the strategic shift; (ii) relatively strong growth is
expected for the industry's smartphone segment at least in 2011;
(iii) the company recently upgraded its product ranges, both for
smart devices and mobile phones, which in itself should boost demand
for these devices, in Moody's view; and (iv) Nokia is
financially strong, enabling it to sufficiently cover any temporary
cash flow shortfalls during the transition from existing cash balances.
However, the A3 rating anticipates a cash flow neutral re-positioning,
whereby restructuring cost will be recovered relatively quickly from cost-saving
measures and, supported by the commercial arrangements with Microsoft,
margin pressure on phones will be well contained.
The outlook for the ratings is negative to reflect substantial challenges
to the above scenario, including (i) possible competitive responses
to the weakening of Nokia's position in the market as volume leader;
and (ii) uncertainty regarding the level of acceptance of the new windows-based
devices, as a result of which Moody's finds it unlikely that
Nokia will regain its former market share of above 30%.
The outlook also reflects (i) possible revenue shortfalls as a result
of disruption in the supply of critical components and epoxys from Japan;
and (ii) the uncertain path to reasonable profitability of Nokia Siemens
Networks (NSN) from a marginal non-IFRS operating profit generated
in 2010. In 2011, NSN is likely to again face component shortages,
like the rest of the industry.
Over the coming quarters, Moody's will monitor (i) Nokia's
last-12-months (LTM) unit sales of mobile phones (351 million
in 2010) and smart devices (100 million); and (ii) the company's
cash flow. Rating pressure could increase if (i) Nokia were to
deviate from Moody's base scenario such that device volumes were
to fall below 340 million and 80 million, respectively; and
(ii) the company were to start consuming material amounts of cash on a
cumulative LTM basis.
A stabilisation of the ratings would require (i) Nokia to avoid the above
negative developments; and (ii) a clear indication that the new windows-based
device range is winning traction with customers, enabling the company
to maintain an overall market share of well above 20% with operating
margins approaching double-digit levels in the current set-up.
A rating upgrade is currently unlikely, but could be driven by sustained
group profit margins above 10% while maintaining the conservative
and liquid capital structure.
The principal methodology used in this rating was Global Communications
Equipment Industry published in June 2008.
Nokia Oyj, headquartered in Espoo, Finland, is the world's
largest manufacturer of mobile communication devices and a leading supplier
of telecommunication network systems. The company reported 2010
net sales of approximately EUR42.4 billion.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
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Frankfurt am Main
Wolfgang Draack
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
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SUBSCRIBERS: 44 20 7772 5454
Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
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Moody's downgrades Nokia to A3/P-2; negative outlook (Finland)
No Related Data.
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