Nokia Oyj had its debt rating cut to the lowest investment-grade level at Moody’s Investors Service less than a week after the Finnish company said its handset unit will make losses in the first two quarters of 2012.
The senior debt rating was reduced by one step to Baa3, with a negative outlook, meaning the ranking may be lowered again if Nokia’s Lumia line fails to pick up or the handset margin deteriorates further, Moody’s said in a statement today, citing deterioration in low-end phones. The rating change affects about 4 billion euros ($5.2 billion) in senior debt.
Nokia is burning cash 14 months after linking up with Microsoft Corp. to make handsets that run on the Windows Phone operating system. The low-end phones business declined 35 percent in revenues in the first quarter as customers upgraded to cheap smartphones running Google Inc.’s Android, Moody’s said. Quarterly adjusted operating margin in handsets will be minus 3 percent of revenue, and the second-quarter margin will be similar or worse, Nokia said April 11.
“Moody’s believes that the structural change 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 promotions by Chinese carriers,” Moody’s analyst Wolfgang Draack said in the statement.
Nokia was trading down 2.4 percent to 2.99 euros at 4:30 p.m. in Helsinki. The cut put Moody’s rating in line with those of Standard & Poor’s and Fitch Ratings.
Credit-default swaps on Nokia rose nine basis points today to a record 516, according to CMA prices at 2:30 p.m. in London. The contracts are up from 354 at the start of the month.
Prioritizing Saving Cash
“Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position,” Chief Financial Officer Timo Ihamuotila said in a statement after the downgrade. The company has a net cash position of 4.9 billion euros and is prioritizing saving cash, he said.
The low-end phone division was “still the core income generator” for Nokia last year, Draack said. Its 12.4 percent operating margin in the fourth quarter permitted Nokia to report a profit in mobile phones despite losses on the smartphone side as it retooled for Windows Phone. The Espoo, Finland-based company that took in almost half the global revenue from smartphones in 2007 now claims 10 percent of the $219 billion-a-year market, data compiled by Bloomberg show.
‘Late to Act’
“The rating agencies have been pretty late to act,” said Louis Landeman, credit analyst at Danske Bank in Stockholm. “There isn’t any flexibility now in the ratings for further disappointment. Moody’s action was not surprising and it was good for Nokia that they didn’t cut them below investment grade now because they would have been justified to do that.”
Landeman rates Nokia’s bonds maturing 2014 “hold” and its bonds maturing 2019 “sell.”
“If the company continues to disappoint, the ratings agencies may move quicker than previously,” he added.
Nokia still doesn’t offer a Windows Phone priced below $150. Its cheapest Windows Phone, the Lumia 610, was announced at a base price of 189 euros, and it’s discontinuing the older Symbian line. It has added more smartphone-like features to the low-end Asha line which has announced list prices from 60 euros to 115 euros.
“Nokia pricing seems out of step with the market,” Morgan Stanley analysts led by Francois Meunier wrote today in a report. Smartphones will soon be available for $60 in China, and $100 in India, they said.
The company said today it will break ground on a new factory in Vietnam next week, which will start production of low-end handsets in 2013. The plant was originally supposed to operate this year and its startup has been delayed by negotiations with the government.