Milan, June 15, 2020 -- Moody's Investors Service, ("Moody's") has
today upgraded to Ba1 from Ba2 the corporate family rating (CFR) and to
Ba1-PD from Ba2-PD the probability of default rating (PDR)
of Telefonaktiebolaget LM Ericsson (Ericsson), a leading global
provider of telecommunications equipment. Concurrently, Moody's
upgraded to Ba1 from Ba2 the company's senior unsecured long-term
ratings, and to (P)Ba1 from (P)Ba2 the senior unsecured medium-term
note (MTN) program rating. The outlook has changed to stable from
positive.
"The rating upgrade to Ba1 reflects the continued successful execution
of Ericsson's strategic plan which is leading to a significant improvement
in the company's operating performance and margins,"
says Ernesto Bisagno, a Moody's Vice President --
Senior Credit Officer and lead analyst for Ericsson.
"The upgrade also reflects the expected steady growth of the radio access
network ("RAN") market, which, combined with the
contribution from new contracts and subsequent market share gains,
will support additional profit growth and positive free cash flow generation,"
adds Mr. Bisagno.
A full list of affected ratings can be found at the end of this Press
Release.
RATINGS RATIONALE
The Ba1 ratings reflect: (1) Ericsson's significant scale and relevance
with a top three global market position in wireless equipment; (2)
expected growth of the RAN market on the back of the contribution from
5G investments; (3) improved momentum with numerous contracts awards
in 2020, (4) strong geographical diversification with sales well
spread across all major regions; and (5) strong liquidity and evidence
of support from its main shareholders.
The rating is constrained by (1) the cyclicality of the telecom equipment
industry; (2) exposure to intense competition and technology risk;
and (3) high investment needs and R&D costs, combined with material
restructuring costs.
Although Moody's expects Ericsson's operating performance
not to be materially exposed to the coronavirus outbreak, there
is increased uncertainty which could weight on profits in the first half
of 2020.
In 2019, Ericsson reported organic revenue growth of 4%,
driven by strong growth in North America and North East Asia, more
than offsetting a weaker performance in Europe and Latin America.
The company's operating income (as adjusted by Moody's) increased
to SEK21.8 billion (SEK3.8 billion in 2018), while
the company's adjusted operating margin (as reported by Ericsson)
was 9.7%, close to the 10% target for 2020,
on the back of stronger gross margin in the networks business, and
reduced operating loss in digital services. Moody's adjusted
operating income in the first quarter of 2020 increased further by 5%
to SEK4.3 billion.
Following the stronger set of results, Moody's adjusted debt to
EBITDA improved to 2.7x at December 2019 (5.7x in 2018),
with a total Moody's adjusted debt of SEK83 billion, which includes
SEK10 billion of operating leases post IFRS 16, and pension liabilities
of SEK36 billion.
In 2020, Moody's expects Ericsson's revenues to increase
in the low-to-mid single digit range, in line with
the growth of the RAN markets. The recent contract wins will also
support market share gains in China and Europe. Any further improvement
in Moody's adjusted operating margins in 2020 would mainly reflect stronger
operating performance in the digital services business, on the back
of the ongoing renegotiation and completion of existing contracts.
However, Ericsson also expects some earnings volatility in the segment
over the next quarters, because of seasonality and change in contract
mix.
In addition, margin improvement would be constrained by higher opex
investments, and the roll out of some strategic large 5G contracts
which have lower initial margins. The uncertainty created by the
coronavirus outbreak is also likely to weigh on margins in the first half
of 2020, with the second half expected to improve sequentially.
In 2021, the rating agency expects further improvement in profitability
on the back increased contribution from the new contracts as the 5G cycle
will enter a more mature phase. Moody's also expects the
company to reach the low end of the operating margin targets of 12%-14%
over 2022-23.
Assuming increased dividends over 2020-21 reflecting improved earnings,
Moody's expects Ericsson to generate free cash flow (Moody's definition)
of around SEK6 billion -- SEK7 billion each year.
As a result, Moody's anticipates additional improvements in Ericsson's
credit metrics with Moody's adjusted gross debt to EBITDA to decline below
2.5x in 2021.
LIQUIDITY
Ericsson's liquidity is good reflecting its: (1) gross cash balance
of SEK56 billion as of March 2020 (including SEK7.8 billion of
short term investments) in addition to SEK23.3 billion of long
term fixed income investments; (2) USD2.0 billion revolving
credit facility (fully undrawn at March 2020), maturing in June
2022 with no financial covenants nor material adverse change conditions
for drawdowns; (3) positive free cash flow generation after dividends;
and (4) limited short term-debt maturities, mainly including
a USD684 million equivalent EIB loan which matures in November 2020.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's expectation that Ericsson's
operating performance will continue to improve driven by a combination
of positive organic growth in revenue, margin gains and ongoing
positive free cash flow generation.
The stable outlook assumes that the company will reach its 10%
operating margin target in 2020 with further progression thereafter,
maintain its current market share in the global telecom equipment market
and keep a strong liquidity profile that would allow it to withstand potential
downturns caused by technology cycles or changes in operating conditions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
In light of the cyclicality of this industry and the potential for rapid
reversals in operating performance when there are changes in technology
cycles or material market share shifts owing to changes in the competitive
dynamics, further upward pressure on the rating is more limited.
However, overtime, positive pressure on the rating could develop
if Ericsson maintains a sustainably robust competitive position and technological
leadership, in particular by growing its market share in the global
telecom equipment market, which is usually translated into further
operating margin gains. Quantitatively, upward pressure would
require (1) operating margins (Moody's adjusted) increasing sustainably
towards 15%; (2) strong free cash flow generation after shareholder
distributions; and (3) a sustained solid liquidity profile and strong
balance sheet with a net cash position (on a Moody's adjusted basis).
The rating could be lowered if the company's operating performance deteriorates
owing to market share losses or adverse operating conditions, such
that its (1) Moody's-adjusted operating income drops below
8%, (2) Moody's-adjusted debt/EBITDA increases sustainably
above 2.5x, or (3) free cash flow turns negative and liquidity
deteriorates.
LIST OF AFFECTED RATINGS
..Issuer: Telefonaktiebolaget LM Ericsson
Upgrades:
....Probability of Default Rating, Upgraded
to Ba1-PD from Ba2-PD
....Corporate Family Rating, Upgraded
to Ba1 from Ba2
....Senior Unsecured Medium-Term Note
Program, Upgraded to (P)Ba1 from (P)Ba2
....Senior Unsecured Regular Bond/Debenture,
Upgraded to Ba1 from Ba2
Outlook Action:
....Outlook, Changed To Stable From
Positive
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Diversified Technology
published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130737.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
COMPANY PROFILE
With reported net sales of SEK228 billion for the twelve months ended
31 March 2020 and EBITDA of SEK30.5 billion, Ericsson is
a 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.
In 2019, Ericsson's Networks division contributed 68% of
the group's net sales, followed by Digital Services at 18%,
Managed Services at 11% and its 'Emerging Business and Other' segment
at 3%.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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.
Ernesto Bisagno, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
