Nokia Rating Cut for First Time by S&P on Smartphone Share
Nokia Debt Rating Cut for First Time by S&P
Henrik Kettunen/Bloomberg
A Nokia Oyj sign is displayed outside the company's offices in Helsinki.
A Nokia Oyj sign is displayed outside the company's offices in Helsinki. Photographer: Henrik Kettunen/Bloomberg
Nokia Chief Executive Officer Stephen Elop
Simon Dawson/Bloomberg
Chief Executive Officer Stephen Elop announced on Feb. 11 that Nokia would adopt Microsoft Corp.’s Windows Phone 7 as its main operating system.
Chief Executive Officer Stephen Elop announced on Feb. 11 that Nokia would adopt Microsoft Corp.’s Windows Phone 7 as its main operating system. Photographer: Simon Dawson/Bloomberg
Nokia Oyj (NOK1V), the world’s biggest maker of mobile phones, had its debt rating cut for the first time by Standard & Poor’s, which cited market share losses and “weaker” operating margins at the Finnish company.
The long-term rating was lowered one step to A- with a stable outlook, S&P said in a statement today. S&P has since June 1998 ranked the debt A, the sixth-highest of 10 investment grades. Moody’s Investors Service has an equivalent A2 rating. Nokia had about 5.3 billion euros ($7.5 billion) in long-term debt at the end of last year.
“The downgrade reflects the revision of our business risk profile assessment on Nokia to ‘satisfactory’ from ‘strong,’” S&P analysts Matthias Raab and Patrice Cochelin wrote in today’s report. “Nokia’s smartphone portfolio will make further significant market share losses during 2011 and 2012 until it has completed its adoption of Microsoft’s Windows Phone software as its new primary software platform for smartphones.”
Chief Executive Officer Stephen Elop, 47, said Feb. 11 that Nokia would adopt Windows Phone 7 as its main operating system, tapering off product lines based on its Symbian software. The CEO now has to help Microsoft attract developers to Windows Phone 7 while trying to keep them loyal to Symbian to keep up sales.
Android Vs. Symbian
Credit-default swaps on Nokia rose 3 basis points to 117, approaching the highest since January 2009, according to CMA prices at 11:45 a.m. in London.
A basis point on a contract protecting 10 million euros ($14 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
The rating change isn’t expected to affect Nokia’s financial position or financing costs, said James Etheridge, a company spokesman. He confirmed the securing of a new undrawn 1.5 billion-euro credit line mentioned in the report, which he said was arranged to replace a previous facility of about $2 billion.
Rival Google Inc. (GOOG)’s Android will displace Symbian this year as the top-selling system used in handsets that enable users to browse the Internet and download movies and songs, while Microsoft will have a share of about 5.5 percent, International Data Corp. said yesterday. Symbian’s share may fall to 0.2 percent in 2015 from 20.9 percent this year, according to the Framingham, Massachusetts-based researcher.
Pricing Pressure
Nokia will encounter “high competitive price pressure” that is likely to push the devices operating margin into single digits during the two-year transition period, before recovering to at least 10 percent in 2013, S&P said today.
Android handsets from vendors such as China’s ZTE Corp. (000063) with prices as low as $150 are grabbing market share from Nokia’s smartphones as well as the high end of its feature-phone line. Nokia aims to offer Windows Phones at a wide range of prices, Elop said on Feb. 11.
The S&P analysts said they could lower the ratings further if Nokia’s smartphone market share falls below 20 percent or if the device margin drops below 5 percent during the 2011-2012 transition period “with limited prospects for a meaningful recovery thereafter.”
Nokia’s share of smartphone sales by volume declined to 30.8 percent in the fourth quarter from 50.8 percent when Apple Inc. (AAPL) began shipping its iPhone in 2007, according to Gartner Inc. figures. Its overall share of the mobile market tumbled to about 27 percent from 36.7 percent in the same period.
The company will have to pay “meaningful” royalties to Microsoft and book expenses on restructuring its research and development organization, S&P said.
Nokia shareholders will vote on a 40 euro cent per-share dividend payment in its annual general meeting on May 3. S&P said it expects the payout to be “largely covered” by free operating cash flow.
To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net
To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net
Rate this Page