UPDATE: S&P Raises Nokia (NOK) From 'B+' to BB'; Sees Gross Debt Reduction, Firm Cash Balances

(Updated - May 15, 2014 12:48 PM EDT)

Standard & Poor's Ratings Services said today that it has raised its long-term corporate credit rating on Finnish technology company Nokia Corp. (NYSE: NOK) and on its subsidiary Nokia Solutions and Networks B.V. (NSN) to 'BB' from 'B+'. The outlook is positive. Also, we affirmed the 'B' short-term rating on Nokia.

At the same time, we raised our issue rating on Nokia's senior unsecured notes to 'BB' from 'B+'. The recovery rating is '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default.

We also raised our issue rating on Nokia Solutions Networks Finance B.V.'s senior unsecured debt to 'BB' from 'B+' and the recovery rating to '3' from '4'. The '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery in the event of a default.

We removed all ratings from CreditWatch where we had placed them on Sept. 9, 2013.

The upgrade reflects our anticipation that the company will reduce gross debt by €2 billion by using part of the €5.6 billion proceeds from the sale of its cash-burning Device & Services (D&S) division, and will keep comfortable cash balances even after Nokia's announced €3 billion of shareholder returns. Given the importance of NSN for the Nokia group following the sale of the cash-burning D&S, we will now equalize our rating on NSN with that on Nokia.

The upgrade of NSN therefore reflects our view of NSN as a "core" subsidiary of Nokia, based notably on its integrated and material role for Nokia and Nokia's full ownership. As per our group rating methodology, the ratings and outlook on NSN mirror the long-term corporate credit rating and outlook on Nokia.

The positive outlook on Nokia and NSN reflects the potential for a one-notch upgrade in the next 12 months if revenues and profitability at least stabilize and FOCF remains positive.

We could raise the rating if consolidated revenues stabilize or grow slightly--which we think would have to stem from increased revenues at Networks in the second half of 2014 and a larger market share, as well as other segments reporting some revenue growth. Also, we would have to observe that consolidated margins after restructuring costs stabilize at current levels and that Nokia generates positive and growing FOCF.

This could lead us to reassess Nokia's financial risk profile as "modest" or its business risk profile as "fair" (the latter would also prompt us to reassess Nokia's financial risk profile upward as we would apply surplus cash adjustment in line with our criteria).

We could revise the outlook to stable if FOCF turned negative, for instance on prolonged revenue decline or market share erosion, or if current margins weakened. A major acquisition could also lead us to revise the outlook to negative.

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