Approximately EUR4.0 billion senior debt affected
Frankfurt am Main, April 16, 2012 -- Moody's Investors Service has today downgraded the senior debt ratings
of Nokia Oyj to Baa3 from Baa2 and its short-term debt ratings
to Prime-3 from Prime-2. All ratings continue to
have a negative outlook.
Issuer: Nokia Oyj ,
..Downgrades:
.... Issuer Rating, Downgraded to Baa3
from Baa2
....Senior Unsecured Commercial Paper,
Downgraded to P-3 from P-2
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)P-3, (P)Baa3 from (P)P-2,
(P)Baa2
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Baa3 from Baa2
Issuer: Nokia Finance International B.V. ,
..Downgrades:
....Senior Unsecured Commercial Paper,
Downgraded to P-3 from P-2
RATINGS RATIONALE
The one-notch rating downgrade was triggered by Nokia's announcement
on 11 April that a severe decline had been recorded in its Q1 2012 mobile
phone unit sales (-16% from Q1, 2011) driving Mobile
Phone segment revenues down 35% compared with Q1 2011. While
volatility by quarters is not uncommon, Moody's believes that
the structural challenges facing Nokia's Mobile Phones segment may
not be easy to address, such as the market share gains recorded
by makers of very low-end phones or new phone promotions by Chinese
carriers. This precipitous decline is of particular concern considering
that Nokia's Mobile Phones segment was still the core income generator
for the Nokia group in 2011, when it contributed EUR1.5 billion
to the group's operating profit of EUR1.8 billion.
In addition, Nokia's transition in its Smart Devices from
Symbian-based phones to the Windows-based Lumia devices
is proving more challenging than expected given that sales of Symbian-based
devices are falling off very quickly while Lumia sales are only ramping
up slowly. Nokia's current Baa3 rating reflects Moody's
expectation that Lumia devices will be accepted in the market in 2012
with the help of price and marketing support and that it will become the
third smartphone system next to Google's Android and Apple's
iOS. Moody's expects that the margin pressure in Nokia's
Mobile Phones segment and the downward migration of lower-end smartphones
into the feature phone category will continue. Nokia is therefore
more reliant on the Smart Devices segment and thus the Lumia product family,
thereby reducing the group's revenue diversification.
Nevertheless, Moody's notes that Nokia has maintained a strong
liquidity position and capital structure. The company's management
indicates that its cash and marketable securities amounted to EUR 9.8
billion, around twice its reported financial debt at the end of
March 2012. Nokia ended Q1 2012 with EUR4.9 billion of net
cash as reported. After generating more than EUR500 million cash
in a seasonally strong Q4, 2011, it consumed almost EUR700
million, in Q1 2012. Part of the Q1 2012 cash burn may be
non-recurring as it was related to working capital; but this
depends largely on a stabilisation of revenues in China, where favourable
payment terms are common. In the meantime, Moody's
expects the build-up of Nokia's inventory of new Lumia devices
to continue for a while, but total cash consumption to reduce in
coming months. Should, contrary to expectations, cash
burn over the coming quarters remain high, pressure on the rating
would increase. For its liquidity needs, Nokia has also a
reliable EUR1.5 billion revolving credit facility due in 2016 without
financial covenants.
In addition to the pressure on its own operations, Nokia may have
to contribute additional capital or funding to Nokia Siemens Networks
(NSN), its communications equipment partnership with Siemens (rated
A1/ positive) if the company's restructuring cost starts to exceed
cash flow from operations. In Q1, 2012 NSN generated a positive
cash flow mostly due to releases of working capital. Yet,
the majority of expenditures for headcount reductions are yet to come,
and the industry it operates in is very price competitive limiting NSN's
operating cash flow potential. NSN has access to a EUR1.4
billion forward start facility which is not guaranteed by its parent companies
but carries financial covenants related to leverage and interest coverage.
Half of the facility matures already in June 2013, the other half,
a revolving credit, in 2015. It is uncertain at this stage,
if (i) the committed amounts provide sufficient liquidity buffer should
cash flow deteriorate, (ii) NSN will continue to meet financial
covenants, and (iii) the accelerated restructuring improves the
credit profile of NSN sufficiently to complete a satisfactory refinancing
before maturity. Any recapitalisation or funding by the sponsors
would actually add cash (representing Siemens' share) to Nokia's
consolidated accounts, but would equally reduce the liquidity of
Nokia for its share.
Nokia's Baa3 ratings carry a negative outlook based on the low performance
visibility stemming from market pressures as well as its product transition
WHAT COULD MOVE THE RATING UP/DOWN
Moody's would consider a rating downgrade below investment grade
if (i) there is evidence that the Lumia product family fails to gain momentum,
for instance by a slowdown in customer pick-up, (ii) the
non-IFRS operating margin for Devices & Services declines further
below -3% and fails to recover in the second half 2012,
or (iii) cash consumption continues at a high level without material reduction
over the coming quarters.
Given that the rating outlook is negative, there is currently limited
potential for an upgrade of Nokia's ratings. However,
a rating upgrade to Baa2 could be triggered by (i) the Windows devices
rivaling the market positions of the Android-based leaders,
(ii) by group revenues starting to grow again and operating margin (1.0%
Moody's adjusted for 2011) reaching high single digit percent,
while (iii) maintaining a net cash position (about EUR3.1 billion
Moody's adjusted per end of 2011). For an outlook stabilization,
(i) the Lumia family of devices needs to prove traction by gaining substantial
market share and returning the Smart Devices segment to non-IFRS
operating profit, (ii) the Mobile Phones segment should at least
stabilize its sales volumes and return to a double-digit contribution
margin, and (iii) cash consumption fall to marginal levels.
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 the world's
largest manufacturer of mobile communication devices, with a share
of around a third of the global market, Nokia is also a leading
supplier of telecommunication network systems. Its net sales in
2011 amounted to about EUR38.7 billion.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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
rating practices. For ratings issued on a support provider,
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
have affected the rating. For further information please see the
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agent(s) and issued with no amendment resulting from that disclosure.
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parties involved in the ratings, and public information.
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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
Associate Managing Director
Corporate Finance Group
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Releasing Office:
Moody's Deutschland GmbH
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Frankfurt am Main 60322
Germany
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Moody's downgrades Nokia to Baa3/P-3, outlook negative
