Nokia Junk Seen in High-Grade Ascent With Microsoft Cash

Nokia Lumia 925
A Nokia Lumia 925 Windows smartphone, manufactured by Nokia Oyj, sits on display in the company's store in Helsinki. Photographer: Tomi Setala/Bloomberg

By selling its money-losing mobile-phone business to Microsoft Corp. for $7.2 billion, Nokia Oyj is now on the cusp of earning an investment-grade rating from the bond market.

The company’s $1 billion of 5.375 percent debt due in May 2019 jumped to a three-year high of 102.9 cents after Nokia said Microsoft agreed to pay 5.44 billion euros for its handset unit. That caused the yield on the junk-rated bonds to fall to 4.79 percent, just 0.25 percentage point more than the average for similar-maturity debt with the lowest investment grade of BBB-, according to data compiled by Bloomberg.

Nokia, founded as a pulp and paper maker almost 150 years ago, is now exiting the mobile-phone business it once dominated after losing customers to Apple Inc.’s iPhone and Google Inc.’s Android system. With the disposal, the Espoo, Finland-based company will now focus on turning around its network-equipment business after gaining full control from Siemens AG last month.

“They certainly have it within their control to go to investment grade,” said Sam Morton, a credit analyst at Mizuho International Plc in London. “People were worried that cash burn in the handset unit would eventually erode Nokia’s net cash position. Disposal of this cash-burning entity has alleviated those concerns.”

‘Ample’ Cash

The network unit had an operating profit on a trailing 12-month basis in the past two quarters after losses from 2007 to 2012, data compiled by Bloomberg show.

“We are certainly targeting a return to investment-grade status,” James Etheridge, a Nokia spokesman, said by e-mail. “Combined with the proceeds from today’s transaction, our cash situation will be ample. As such, the starting point will be a strong one.”

Credit-default swaps protecting against a non-payment by Nokia plunged to 213 basis points, or 2.13 percentage points, from 529 Sept. 2, making the debt the fourth-cheapest to insure in the Markit iTraxx Crossover Index, the European high-yield benchmark, behind Infineon Technologies Holding BV, Grohe Holding GmbH and Smurfit Kappa Acquisitions, Bloomberg data show.

Eight companies in the region’s investment-grade barometer were more expensive. The swaps now signal Nokia should have a Ba1 ranking, one step below investment grade and three levels above its actual rating, according to Moody’s Analytics.

Ratings Cuts

Moody’s Investors Service cut Nokia’s debt to B1 with a “negative” outlook on Aug. 22 after the company bought out its partner in the Nokia Siemens Networks venture for 1.7 billion euros, citing concern it would be “unlikely to reach break even on a cash flow basis before well into 2014, at the earliest.”

Standard & Poor’s lowered Nokia to an equivalent B+ in July. Investment-grade bonds are rated Baa3 or higher at Moody’s and at least BBB- by S&P.

Nokia reported a 27 percent drop in the number of handsets sold in the second quarter, contributing to a 24 percent decline in revenue, as sales of its Lumia smartphone failed to make up for weakening demand for its older and more basic handsets.

While Nokia claimed 19.3 percent of the global handset market by units last year, second only to Samsung Electronics Co.’s 23.5 percent, it was in eighth place among smartphone makers, with 4.8 percent, according to data compiled by Bloomberg Industries. Lower prices pushed it to third place in handsets by value, with 5.9 percent behind Samsung, the leading maker of Android phones, and Apple, which together accounted for 59 percent of the market.

‘Cash Concerns’

Nokia reported net cash of 4.1 billion euros at the end of the second quarter. That compares with 4.4 billion euros of bonds outstanding, including 1.25 billion euros coming due next year, Bloomberg data show.

“This satisfies some of the cash concerns that weren’t pressing as of today, but clearly would have been in the future,” said Dave Novosel, a senior analyst at Chicago-based bond research firm Gimme Credit. “The fact they’ll have such an influx of cash” may make returning to investment grade “possible, but they’ll have to show improvement,” he said.

The company lost its investment-grade ratings last year, Bloomberg data show.

Nokia started in 1865 as a wood-pulp mill on the banks of the Nokianvirta river in southwestern Finland, from which it derived its name. Its businesses evolved from paper, “one of the most influential communications technologies in history,” to mobile telecommunications, according to the company’s website. It’s also been involved in rubber, cable, forestry, electronics and power generation.

Payment Terms

Microsoft will pay 3.79 billion euros for Nokia’s devices division and 1.65 billion euros for patents, according to a statement from the companies. The all-cash transaction, subject to Nokia investors’ approval, is expected to be completed in the first quarter of 2014.

Nokia said it will book a gain of 3.2 billion euros, with the sale “significantly” accretive to earnings, according to the statement. Chairman Risto Siilasmaa, who will become Nokia’s interim chief executive officer, said at a press conference that the company may return excess capital to shareholders.

“Shareholders will probably want to see a lot of that given back and bondholders will clearly like to see good chunk of it stay there in order to cover investment in the network business,” said Aengus McMahon, a London-based analyst at ING Groep NV. “There will certainly be tension over how much cash the company will retain or dole out to investors.”

The stock gained 34 percent to 3.97 euros yesterday and was trading at 3.98 euros today, the highest since April 2012.

Nokia’s 5.375 percent bonds traded as high as 105.5 cents on the dollar yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Their 4.80 percent yield falls between 4.54 percent for BBB-rated notes of similar maturities and characteristics, and 5.88 percent for securities rated BB+, Bloomberg data show.

“This makes a tiny pinprick in Microsoft’s cash pile,” McMahon said. Nokia is “still a declining business, but now it has a bucket load of cash, so a lot more time to sort that out.”

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