Nokia Bonds Rally as Lumia-Led Turnaround Gathers Pace

Buyers of Nokia Oyj (NOK1V)’s debt are joining equity holders in reaping rewards as Chief Executive Officer Stephen Elop’s plan to salvage the Finnish smartphone maker gathers pace.

Nokia’s handset unit is poised for the first break-even result or profit in a year, the company said yesterday, giving the latest signal that new devices and cost cuts are gaining traction. Nokia’s 750 million euros ($995 million) of convertible bonds jumped 7.6 percent yesterday and were up 2.5 percent today, bringing their advance to 52 percent since first sold in October.

Improving smartphone sales and job cuts exceeding 20,000 under Elop have prompted investors to reassess the junk-rated company’s chances of survival. Faced with dwindling cash and competition from Apple Inc. and Google Inc., Nokia is showing that it can cope with the challenges, said Arne Eidshagen, who helps manage about 400 million euros in high-yield debt at Alfred Berg Asset Management in Oslo.

“Nokia is coming out with decent products and they seem to be managing their transition, adapting as a company, quite well,” said Eidshagen, who has bought Nokia’s debt, including the convertible bonds, after considering the company too risky about nine months ago. “The convertible bonds have been a tremendous success story.”

The extra yield that investors demand to hold Nokia’s senior unsecured 6.75 percent notes due 2019, compared with benchmark government debt, has narrowed to 430 basis points from as much as 930 basis points in July.

Mounting Losses

Nokia said yesterday operating profit at its handset unit, excluding some items, was at a break-even level or as much as 2 percent of sales last quarter. In October, it had projected an operating loss for the unit of as much as 10 percent of sales.

Before the fourth quarter, Nokia had accumulated 4.8 billion euros in losses since Elop started his bet in early 2011 on phones using Microsoft Corp. (MSFT)’s Windows software.

In the middle of last year, Nokia rattled markets as many worried over the company’s shrinking cash pile, sending the cost of insuring Nokia bonds using credit-default swaps to a high of 1,240 in July and its stock to the lowest level since 1994.

Nokia shares have more than doubled since, reaching a nine- month high yesterday. The stock climbed 3.7 percent to 3.45 euros at 10:52 a.m. in Helsinki, adding to yesterday’s 11 percent rise. Five-year CDS contracts have fallen 53 percent to 583 basis points, to the lowest level since May.

Cash Dwindles

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

A total of 3,865 credit-default swaps contracts are outstanding on Nokia, covering $1.3 billion of debt, according to the Depository Trust & Clearing Corp., which runs a central registry for the market.

A return to profit couldn’t come too soon for the company as it tries to cope with waning cash. Its reserves have shrunk by about half in the past five years, with net cash dropping to 3.6 billion euros in the third quarter from 4.2 billion euros at the end of June. It has 1.25 billion euros of bonds maturing next year.

The phonemaker lost its investment-grade rating from Moody’s Investors Service in June and is now graded Ba3. Standard & Poor’s, which grades it an equivalent BB-, stripped it of investment-grade status in April. Both companies have negative outlooks on the issuer, a signal they expect any rating change will be lower.

‘More Confidence’

Besides cutting jobs and selling assets such as its headquarters in recent months, Nokia has made progress in winning over users. Last month, the company gained China Mobile Ltd. (941), the country’s largest wireless carrier, as a customer for its Lumia 920T phone. There were also reports Lumia models were selling out in some markets, and Elop said yesterday the company had supply constraints last quarter.

“Investors were worried about the company’s cash position and smartphone future,” said Michael Schroeder, an analyst at FIM Bank Oyj in Helsinki. “With signs of the Lumia gaining traction and Nokia showing it can divest assets and sign license deals, the market has more confidence.”

Nokia has also benefited from its network-equipment joint venture with Siemens AG (SIE) returning to profit. Nokia said yesterday the venture had a fourth-quarter operating profit of 13 percent to 15 percent of sales excluding some items, beating the company’s predictions.

To further shore up its finances, Nokia is projected to skip its dividend for the first time since at least 1989, according to data compiled by Bloomberg.

Hit Needed

Nokia still has a long way to recovery. The company, which controlled more than half of global smartphone sales before the first iPhone and Android devices were introduced, now accounts for about 4 percent of the market, according to research firm Strategy Analytics. IPhone and Android combined make up about 90 percent of the market.

To make further progress, Nokia will “need a hit model from the Lumia range that captures the popular imagination of wealthy American, Chinese and European consumers,” said Neil Mawston, an analyst at Strategy Analytics in London. Nokia isn’t yet winning “the hearts and minds of mass-market consumers.”

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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