Moody's Upgrades Nokia (NOK) to 'Ba1'; Outlook Remains Stable

Moody's Investors Service ("Moody's") has upgraded the Corporate Family Rating ("CFR") and the senior unsecured debt instrument ratings of Nokia Oyj (NYSE: NOK) to Ba1 from Ba2 as well as its Probability of Default Rating ("PDR") to Ba1-PD from Ba2-PD. The Not Prime (NP) rating on Commercial Paper issued by Nokia and by Nokia Finance International B.V. is affirmed and the rating outlook on Nokia ratings remains stable. Concurrently, Moody's has withdrawn the B2 CFR and B2-PD Probability of Default ratings on Alcatel-Lucent as well as the B3 debt-level ratings on Alcatel-Lucent's senior unsecured convertible bonds due 2019 and 2020. Please see below a complete list of all Moody's ratings affected by this action.

The upgrade of Nokia's ratings principally reflects the enhanced scale and diversification of Nokia following its combination with Alcatel-Lucent as well as the notable progress Nokia has made, through a series of concrete transaction milestones, in furthering its combination with Alcatel-Lucent since announcing the transaction in April 2015. These are in addition to material debt reduction that Nokia has effected at both Nokia and Alcatel-Lucent over the past year as well as an expectation for an improved financial profile for the combined company over the next 18 months.

The upgrade to Ba1 of the debt instrument ratings on Nokia's senior unsecured notes and Euro MTN program correspond to the declining default risk of these obligations as Nokia's CFR approaches an investment-grade level.

In addition, Moody's has withdrawn all existing ratings on Alcatel-Lucent because it believes it has insufficient or otherwise inadequate information to support the maintenance of those ratings.

"Nokia's rating upgrade to Ba1, just below investment-grade, acknowledges the greater scale along with the complementary product and geographic diversification that Alcatel-Lucent adds. It also recognises the debt reduction Nokia has executed over the past year and the progress made in furthering the companies' combination whilst recognising that the integration plan is still in its early stages." says Alejandro Núñez, a Moody's Vice President -- Senior Analyst and lead analyst for the issuer.

RATINGS RATIONALE

The rating upgrade reflects: (1) Nokia's greater scale and solid complementary positions across fixed and mobile network markets particularly in the growing IP and cloud market segments; (2) a clear governance structure, capital return policy and business strategy focused on fixed/mobile networks and the development of intellectual property; (3) material debt reduction and a strong liquidity position; balanced against (4) limited near-term growth prospects bounded by a slowdown in global networking equipment spending; and (5) challenges as Nokia continues to integrate Alcatel-Lucent and carry out a cost reduction plan targeting over EUR 900 million of cost savings by 2018.

Nokia's integration of Alcatel-Lucent should provide Nokia with a broader and complementary product platform spanning strong (#1 or #2 global) positions in fixed and mobile networking equipment and services, broader geographic diversity especially in key markets such as Internet Protocol ("IP") and in North America, and better resilience in the face of these end markets' cycles. Despite the fact that the operational integration of Alcatel-Lucent commenced in January 2016, we find Nokia's integration plan to be measured and clearer than those of the sector's previous combinations. Although the integration is likely to last into fiscal year 2018 (FY18), we anticipate that Nokia could achieve its targeted cost synergies (of more than EUR 900 million relative to FY15) gradually, particularly from FY17, although we recognize that over the next two years Nokia will also incur significant restructuring costs of slightly more than the targeted cost synergies in order to achieve them.

We anticipate that Nokia's full integration of Alcatel-Lucent is likely to last at least through the end of FY17 and that its success will, as in the past, depend to a large degree on how customers react to the combination as well as on the assimilation of the companies' platforms and cultures. Newer network technologies that are increasingly software-driven and based on Internet Protocol ("IP") should help facilitate an integration of customers' network infrastructures requiring less physical hardware replacement.

After divesting its Devices & Services unit to Microsoft in 2013 and its HERE maps division to a consortium of German auto manufacturers in 2015, Nokia's strategy has been more focused on its communications networking equipment (via its Nokia Networks division) and its related intellectual property (Nokia Technologies). In addition, given Nokia's announcements in H1 2016 regarding Nokia's redefined business divisions and management structure, it is clear that it will be primarily Nokia's management that will drive the integration of the two companies. We believe this clear governance structure and strategy should frame Nokia's integration plan better than previous attempts at combining companies in this sector.

In terms of liquidity, Nokia exhibits very good liquidity supported primarily by its balance sheet gross cash and other liquid assets of EUR 12.5 billion compared with its interest-bearing liabilities of EUR 4.2 billion (as at Q1 FY16), a ratio of 3.0x. Nokia's liquidity is also supported by its access to an undrawn revolving credit facility of EUR 1.5 billion committed through 2018. Following a series of Alcatel-Lucent bond redemptions executed by Nokia in the first half of 2016, in line with Nokia's EUR 7 billion capital structure optimization program announced in October 2015, all debt instruments in the combined company's capital structure are based on investment grade documentation and have no financial covenants.

Moody's has withdrawn the rating because it believes it has insufficient or otherwise inadequate information to support the maintenance of the rating. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects our expectation that: (1) Nokia's operating profitability will not be adversely impacted in a sustainable way as a result of slowing market growth and/or its integration of Alcatel-Lucent; (2) Nokia will generate positive free cash flow in FY16-FY18 to be applied toward covering near-term cash restructuring costs and accumulating cash; (3) Nokia will not effect a meaningfully more aggressive change to its current capital redistribution policies (as embodied in its Capital Structure Optimization Program); and, (4) Nokia will continue to maintain a solid liquidity profile. The outlook also reflects our anticipation that Nokia's adjusted leverage (Gross Debt/EBITDA as adjusted by Moody's) will trend toward 2.0x by the end of FY17.

WHAT COULD CHANGE THE RATING UP

Positive rating pressure could develop on Nokia's ratings if: (1) its operating performance, including revenue growth and operating margins, and outlook were to materially improve; (2) Nokia were to achieve a Gross Debt / EBITDA ratio (as adjusted by Moody's) consistently in the 1.5x - 1.75x range; and (3) a Free Cash Flow (FCF) / Debt ratio (as adjusted by Moody's) sustainably toward 20%.

WHAT COULD CHANGE THE RATING DOWN

Negative pressure could be exerted on Nokia's ratings in the case of: (1) a material decline in operating performance or profitability relative to FY16 levels and expectations; (2) a failure to continue along a deleveraging trajectory particularly if Gross Debt/ EBITDA ratio (as adjusted by Moody's) were to increase sustainably above 2.25x; (3) a deterioration in its Free Cash Flow (FCF, as adjusted by Moody's) such that it turns neutral or negative for a prolonged period; and (4) a loosening of the company's financial policies particularly with regard to capital redistribution.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Diversified Technology Rating Methodology published in December 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Nokia operates two main business segments - Nokia Networks, composed of Ultra Broadband Networks and IP Networks & Applications, and Nokia Technologies. It had revenues of approximately EUR 26.1 billion for LTM March 2016. Nokia Networks (93% of revenues) is a leading provider of radio access/mobile broadband wireless equipment and services to telecommunications operators. It provides mobile, fixed and converged network technologies as well as services mainly to telecom carriers. Nokia Technologies (4% of group revenues) is a licensing, brand and technology development business.

On 4 January 2016, Nokia completed the acquisition of Alcatel-Lucent in an all-share deal that valued its French rival at EUR 15.6 billion. As of 6 June 2016, Nokia holds 94.17% of Alcatel-Lucent's shares on a fully diluted basis. In December 2015, Nokia completed the sale of its HERE maps division to a consortium of auto manufacturers for a cash consideration of EUR 2.5 billion.

List of affected ratings

Upgrades:

..Issuer: Nokia Oyj

.... Probability of Default Rating, Upgraded to Ba1-PD from Ba2-PD

....LT Corporate Family Rating , Upgraded to Ba1 from Ba2

....Senior Unsecured MTN, Upgraded to (P)Ba1 from (P)Ba2

....Senior Unsecured Regular Bond/Debenture, Upgraded to Ba1 from Ba2

Affirmations:

..Issuer: Nokia Finance International B.V.

....Backed Commercial Paper, Affirmed NP

..Issuer: Nokia Oyj

....Commercial Paper, Affirmed NP

....Other Short Term, Affirmed (P)NP

Withdrawals:

..Issuer: Alcatel-Lucent

.... Probability of Default Rating, Withdrawn , previously rated B2-PD

.... LT Corporate Family Rating , Withdrawn , previously rated B2

....Senior Unsecured Conv./Exch. Bond/Debenture , Withdrawn , previously rated B3

Outlook Actions:

..Issuer: Nokia Oyj

....Outlook, Remains Stable

..Issuer: Alcatel-Lucent

....Outlook, Changed To Rating Withdrawn From Rating Under Review

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