Ericsson Credit Rating Cut by Moody’s as Crisis Intensifies

  • Moody’s cites acceleration in sales and earnings decline
  • Rating may be cut further, depending on liquidity management

Ericsson AB had its credit rating cut by Moody’s Investors Service after the Swedish phone-network maker revealed this week that waning demand means it won’t reach the profit goals it had set for itself.

The rating was reduced one level to Baa2 from Baa1, Moody’s said in a statement Friday. The firm may lower it further, depending on matters including Ericsson’s dividend policy and how the company manages its liquidity amid “the expected cash burn,” Moody’s said. The new rating is two steps above junk.

Ericsson reported plunging third-quarter sales and earnings this week, deepening a crisis at a company already slashing jobs to cope with slumping demand and intensifying competition. Chief Executive Officer Jan Frykhammar told investors Ericsson’s savings plans aren’t enough to keep up with revenue dropoff, and he couldn’t predict when an upturn would come. With the stock reeling, analysts are now predicting Ericsson may lower its dividend to conserve cash.

“The ratings downgrade to Baa2 reflects the continuation and acceleration of Ericsson’s sales and earnings decline,” Alejandro Nunez, an analyst at Moody’s, said in the statement. That drop probably will persist into 2017, he said.

Moody’s said it expects to conclude its review of Ericsson’s ratings within three months. S&P Global Ratings put the company on review in July, placing a negative outlook on the company’s BBB+ rating, three levels above junk.

Ericsson’s bonds have been falling in recent weeks. Still, its 500 million euros of notes due 2017 trade above par, as do the $1 billion of dollar-denominated bonds due in 2022. The cost to insure Ericsson’s senior debt against a default has jumped to 105 basis points this month, which is the most since June 2013, according to data compiled by Bloomberg.

The shares have also tumbled. Ericsson, slipped less than 1 percent to 48.09 kronor at 10:02 a.m. in Stockholm, bringing the decline to 21 percent for the week.

Danske Capital, a fund managed by Denmark’s biggest bank, is among investors that have exited Ericsson bonds this year, saying they were simply too risky to hold.

Ericsson is likely to cut its dividend for 2016 to support its credit rating, said Johanna Ahlqvist, an analyst at SEB. Ahlqvist expects Ericsson to pay shareholders 1.50 kronor a share, down from the 3.70-krona dividend paid for 2015.

A one-notch downgrade is “acceptable,” Ahlqvist said in a note Thursday. “But we doubt the company would risk being downgraded further.”

Ericsson is trying to revive earnings growth as it competes with Huawei Technologies Co. and Nokia Oyj for profits in an increasingly tough market. Phone carriers are curbing investments after spending billions of dollars building fourth-generation network systems so users can stream music and video on phones and tablets. Meanwhile, demand for next-generation, so-called 5G equipment, is yet to pick up as the technology isn’t ready yet.

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