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Rating Action:

Moody's downgrades Nokia to A3/P-2; negative outlook (Finland)

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.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Wolfgang Draack
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
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Frankfurt am Main 60322
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JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Nokia to A3/P-2; negative outlook (Finland)
No Related Data.
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