Nokia Escaping Junk No Certainty After Cash Boon: Nordic CreditAdam Ewing
The 5.44 billion euros ($7.4 billion) in cash Nokia Oyj will reap from selling its struggling mobile phone business may not be enough to allow an escape from its junk status.
Once the biggest mobile phone maker, Nokia’s debt rating has been cut to four levels below investment grade over the past years after it lost the smartphone battle to Apple Inc. and Samsung Electronics Co. Nokia has said it will try to return to investment-grade status to lower borrowing costs, helping it over time save “tens of millions” of euros, said Sam Morton, an analyst at Mizuho International Plc.
Nokia agreed to sell the phone unit in September, after failing to offer alternatives to Apple’s iPhone in 2007 and devices running Google Inc.’s Android. The Espoo, Finland-based company is now seeking to emerge as a network-equipment provider, taking on such competitors as Sweden’s Ericsson AB in the biggest strategic shift since Nokia stopped making rubber boots and tires and left businesses such as papermaking more than two decades ago.
“It’s positive to receive cash, but it depends on how they will use it,” Thierry Guermann, an analyst at Standard & Poor’s in Stockholm, said in an interview. “The three things we are focusing on are strategic plans, positive free cash flow generation and the capital structure.”
The yield on the company’s $1 billion of 5.375 percent debt due in May 2019 has traded at an average 4.877 percent since Sept. 3 when the handset unit sale to Microsoft Corp. was announced, compared with an average 5.897 percent in the three months preceding the deal. Nokia shareholders approved the sale on Nov. 19. The cost of insuring against default has traded on average 148 basis points less than the Markit iTraxx Crossover Index, the European high-yield credit-default swaps benchmark.
Nokia has racked up losses of more than 5 billion euros over the past 10 quarters as Stephen Elop, who joined just over three years ago from Microsoft, ditched Nokia’s own software to partner with his former employer’s Windows platform and slashed more than 25,000 jobs to turn the company around. As revenue plummeted and its cash level declined, rating companies pushed the former tech giant’s debt deep into junk status.
Moody’s Investors Service cut Nokia’s debt to B1, four levels below investment grade, on Aug. 22 after the company bought out its partner Siemens AG in the networks venture for 1.7 billion euros. Prospects on the debt were raised to developing from negative on Sept. 5 and Moody’s said it could upgrade the rating “if Nokia’s strategic review leads to a stable business profile, and the group extends its track record of positive operating performance” and manages a conservative capital structure.
“It takes a longer time to go up than it does down,” said Guermann at Standard & Poor’s, which rates Nokia at an equivalent B+. “They were investment grade and the decline was quite rapid.”
NSN Chief Executive Rajeev Suri has cut more than 25,000 jobs at the network unit over the past two years to bring it back to profit. Nokia in October predicted improving profitability for Nokia Solutions and Networks this quarter, helped by the job reductions and a focus on more lucrative contracts.
After the divestment, more than 90 percent of Nokia’s sales will be generated by the networks business. Revenue at NSN fell an annual 26 percent to 2.59 billion euros last quarter, in part because of pulling out of less-profitable service contracts. Ericsson, the largest maker of wireless gear, said revenue slipped 3 percent last quarter, partly due to the strength of the Swedish krona.
“Rating agencies are always cautious when it comes to upgrading fallen angels,” said Morton. “We think that Nokia should be an upgrade candidate in 2014.”
Nokia is considering a tie-up with Alcatel-Lucent SA’s wireless-equipment unit, a person familiar with the plan said in September. Nokia spokesman James Etheridge declined to comment. Alcatel-Lucent is cutting 10,000 jobs to accelerate a cost-cut plan, and plans to sell 1 billion euros worth of assets by 2015.
Nokia may need to buy or merge with another company in order to achieve “sustainable competitive advantage in the equipment space,” Morton said. “Increased scale might persuade rating agencies of its medium-term cash generation and allow the upgrade to follow.”
The deal with Microsoft is expected to close in the first quarter and the Finnish company is assessing its future strategy. It plans to release any “excess” capital to shareholders, it said in its third-quarter report. The ratings boost may be elusive as Nokia will need to spend cash on its networks unit to ensure it can take on competitors, said Rick Mattila, head of strategy and research at Mitsubishi UFJ Securities in London.
“Investment grade is still a distant target,” Mattila said. “The company will need to invest heavily to compete in the network equipment space with the likes of Ericsson.”