Nokia Oyj (NOK1V)’s debt rating was cut to junk at Moody’s Investors Service, the last of the three major credit-rating companies to strip the Finnish mobile-phone maker of its investment grade because of mounting handset losses.
The senior debt rating was reduced by one step to Ba1, the highest non-investment grade, with a negative outlook, Moody’s said in a statement today. The decision affects about 3.6 billion euros ($4.5 billion) in debt, Moody’s said.
Nokia’s restructuring plan “delineates a scale of earnings pressure and cash consumption that is larger than we had previously assumed,” Wolfgang Draack, a senior vice president at Moody’s, said in the statement.
Nokia Chief Executive Officer Stephen Elop announced a restructuring plan yesterday including as many as 10,000 job cuts. The Espoo, Finland-based company said it expects to book 1.25 billion euros in cash outflows for its restructuring programs from the second quarter through the end of 2013.
The company is “running out of time” and must reduce cash outflow or its debt rating will be cut again, Fitch Ratings said in a statement today.
Standard & Poor’s and Fitch cut Nokia in April to BB+, their highest junk grade, with a negative outlook.
“Although the cost-cutting provides some relief, ultimately the company needs to demonstrate that its products are attractive to consumers and can enable it to win back market share,” Owen Fenton, a London-based Fitch analyst, said in the statement.
The cost of insuring Nokia bonds using credit-default swaps climbed to a record high today. It rose 25 basis points, or 2.7 percent, to 933 basis points, according to Bloomberg prices. 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 insurance cost has risen 163 percent this year.
Elop’s shift to using Microsoft Corp. (MSFT)’s Windows Phone operating system hasn’t stopped Nokia losing smartphone market share to Apple Inc. (AAPL)’s iPhone and handsets with Google Inc. (GOOG)’s Android software. Nokia smartphone shipments fell 51 percent in the first quarter while low-end phone shipments tumbled 16 percent. Competition in the third quarter will be tough as well, Elop said.
“We believe we have the net cash needed to manage through this transition and the scope of today’s changes is designed to ensure this remains true,” he said June 14 on a conference call about the restructuring plan.
Nokia’s net cash and other liquid assets shrank to 4.9 billion euros at the end of the first quarter, from 5.6 billion euros at the close of 2011 and 6.4 billion euros at the end of March 2011.
Nokia predicted a second-quarter operating loss in handsets of more than 3 percent of sales.