Moody's Cuts Nokia (NOK) Rating from Baa2 to Baa3; Outlook Negative
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Moody's Investors Service has today downgraded the senior debt ratings of Nokia Oyj (NYSE: NOK) to Baa3 from Baa2 and its short-term debt ratings to Prime-3 from Prime-2. All ratings continue to have a negative outlook.
The one-notch rating downgrade was triggered by Nokia's announcement on
11 April that a severe decline had been recorded in its Q1 2012 mobile phone unit sales (-16% from Q1, 2011) driving Mobile Phone segment revenues down 35% compared with Q1 2011. While volatility by quarters is not uncommon, Moody's believes that the structural challenges facing Nokia's Mobile Phones segment may not be easy to address, such as the market share gains recorded by makers of very low-end phones or new phone promotions by Chinese carriers. This precipitous decline is of particular concern considering that Nokia's Mobile Phones segment was still the core income generator for the Nokia group in 2011, when it contributed EUR1.5 billion to the group's operating profit of EUR1.8 billion.
In addition, Nokia's transition in its Smart Devices from Symbian-based phones to the Windows-based Lumia devices is proving more challenging than expected given that sales of Symbian-based devices are falling off very quickly while Lumia sales are only ramping up slowly. Nokia's current Baa3 rating reflects Moody's expectation that Lumia devices will be accepted in the market in 2012 with the help of price and marketing support and that it will become the third smartphone system next to Google's Android and Apple's iOS. Moody's expects that the margin pressure in Nokia's Mobile Phones segment and the downward migration of lower-end smartphones into the feature phone category will continue.
Nokia is therefore more reliant on the Smart Devices segment and thus the Lumia product family, thereby reducing the group's revenue diversification.
Nevertheless, Moody's notes that Nokia has maintained a strong liquidity position and capital structure. The company's management indicates that its cash and marketable securities amounted to EUR 9.8 billion, around twice its reported financial debt at the end of March 2012. Nokia ended
Q1 2012 with EUR4.9 billion of net cash as reported. After generating more than EUR500 million cash in a seasonally strong Q4, 2011, it consumed almost EUR700 million, in Q1 2012. Part of the Q1 2012 cash burn may be non-recurring as it was related to working capital; but this depends largely on a stabilisation of revenues in China, where favourable payment terms are common. In the meantime, Moody's expects the build-up of Nokia's inventory of new Lumia devices to continue for a while, but total cash consumption to reduce in coming months. Should, contrary to expectations, cash burn over the coming quarters remain high, pressure on the rating would increase. For its liquidity needs, Nokia has also a reliable EUR1.5 billion revolving credit facility due in 2016 without financial covenants.
In addition to the pressure on its own operations, Nokia may have to contribute additional capital or funding to Nokia Siemens Networks (NSN), its communications equipment partnership with Siemens (rated A1/
positive) if the company's restructuring cost starts to exceed cash flow from operations. In Q1, 2012 NSN generated a positive cash flow mostly due to releases of working capital. Yet, the majority of expenditures for headcount reductions are yet to come, and the industry it operates in is very price competitive limiting NSN's operating cash flow potential. NSN has access to a EUR1.4 billion forward start facility which is not guaranteed by its parent companies but carries financial covenants related to leverage and interest coverage. Half of the facility matures already in June 2013, the other half, a revolving credit, in 2015. It is uncertain at this stage, if (i) the committed amounts provide sufficient liquidity buffer should cash flow deteriorate, (ii) NSN will continue to meet financial covenants, and (iii) the accelerated restructuring improves the credit profile of NSN sufficiently to complete a satisfactory refinancing before maturity. Any recapitalisation or funding by the sponsors would actually add cash (representing Siemens' share) to Nokia's consolidated accounts, but would equally reduce the liquidity of Nokia for its share.
Nokia's Baa3 ratings carry a negative outlook based on the low performance visibility stemming from market pressures as well as its product transition
WHAT COULD MOVE THE RATING UP/DOWN
Moody's would consider a rating downgrade below investment grade if (i) there is evidence that the Lumia product family fails to gain momentum, for instance by a slowdown in customer pick-up, (ii) the non-IFRS operating margin for Devices & Services declines further below -3% and fails to recover in the second half 2012, or (iii) cash consumption continues at a high level without material reduction over the coming quarters.
Given that the rating outlook is negative, there is currently limited potential for an upgrade of Nokia's ratings. However, a rating upgrade to Baa2 could be triggered by (i) the Windows devices rivaling the market positions of the Android-based leaders, (ii) by group revenues starting to grow again and operating margin (1.0% Moody's adjusted for 2011) reaching high single digit percent, while (iii) maintaining a net cash position (about EUR3.1 billion Moody's adjusted per end of 2011). For an outlook stabilization, (i) the Lumia family of devices needs to prove traction by gaining substantial market share and returning the Smart Devices segment to non-IFRS operating profit, (ii) the Mobile Phones segment should at least stabilize its sales volumes and return to a double-digit contribution margin, and (iii) cash consumption fall to marginal levels.
The one-notch rating downgrade was triggered by Nokia's announcement on
11 April that a severe decline had been recorded in its Q1 2012 mobile phone unit sales (-16% from Q1, 2011) driving Mobile Phone segment revenues down 35% compared with Q1 2011. While volatility by quarters is not uncommon, Moody's believes that the structural challenges facing Nokia's Mobile Phones segment may not be easy to address, such as the market share gains recorded by makers of very low-end phones or new phone promotions by Chinese carriers. This precipitous decline is of particular concern considering that Nokia's Mobile Phones segment was still the core income generator for the Nokia group in 2011, when it contributed EUR1.5 billion to the group's operating profit of EUR1.8 billion.
In addition, Nokia's transition in its Smart Devices from Symbian-based phones to the Windows-based Lumia devices is proving more challenging than expected given that sales of Symbian-based devices are falling off very quickly while Lumia sales are only ramping up slowly. Nokia's current Baa3 rating reflects Moody's expectation that Lumia devices will be accepted in the market in 2012 with the help of price and marketing support and that it will become the third smartphone system next to Google's Android and Apple's iOS. Moody's expects that the margin pressure in Nokia's Mobile Phones segment and the downward migration of lower-end smartphones into the feature phone category will continue.
Nokia is therefore more reliant on the Smart Devices segment and thus the Lumia product family, thereby reducing the group's revenue diversification.
Nevertheless, Moody's notes that Nokia has maintained a strong liquidity position and capital structure. The company's management indicates that its cash and marketable securities amounted to EUR 9.8 billion, around twice its reported financial debt at the end of March 2012. Nokia ended
Q1 2012 with EUR4.9 billion of net cash as reported. After generating more than EUR500 million cash in a seasonally strong Q4, 2011, it consumed almost EUR700 million, in Q1 2012. Part of the Q1 2012 cash burn may be non-recurring as it was related to working capital; but this depends largely on a stabilisation of revenues in China, where favourable payment terms are common. In the meantime, Moody's expects the build-up of Nokia's inventory of new Lumia devices to continue for a while, but total cash consumption to reduce in coming months. Should, contrary to expectations, cash burn over the coming quarters remain high, pressure on the rating would increase. For its liquidity needs, Nokia has also a reliable EUR1.5 billion revolving credit facility due in 2016 without financial covenants.
In addition to the pressure on its own operations, Nokia may have to contribute additional capital or funding to Nokia Siemens Networks (NSN), its communications equipment partnership with Siemens (rated A1/
positive) if the company's restructuring cost starts to exceed cash flow from operations. In Q1, 2012 NSN generated a positive cash flow mostly due to releases of working capital. Yet, the majority of expenditures for headcount reductions are yet to come, and the industry it operates in is very price competitive limiting NSN's operating cash flow potential. NSN has access to a EUR1.4 billion forward start facility which is not guaranteed by its parent companies but carries financial covenants related to leverage and interest coverage. Half of the facility matures already in June 2013, the other half, a revolving credit, in 2015. It is uncertain at this stage, if (i) the committed amounts provide sufficient liquidity buffer should cash flow deteriorate, (ii) NSN will continue to meet financial covenants, and (iii) the accelerated restructuring improves the credit profile of NSN sufficiently to complete a satisfactory refinancing before maturity. Any recapitalisation or funding by the sponsors would actually add cash (representing Siemens' share) to Nokia's consolidated accounts, but would equally reduce the liquidity of Nokia for its share.
Nokia's Baa3 ratings carry a negative outlook based on the low performance visibility stemming from market pressures as well as its product transition
WHAT COULD MOVE THE RATING UP/DOWN
Moody's would consider a rating downgrade below investment grade if (i) there is evidence that the Lumia product family fails to gain momentum, for instance by a slowdown in customer pick-up, (ii) the non-IFRS operating margin for Devices & Services declines further below -3% and fails to recover in the second half 2012, or (iii) cash consumption continues at a high level without material reduction over the coming quarters.
Given that the rating outlook is negative, there is currently limited potential for an upgrade of Nokia's ratings. However, a rating upgrade to Baa2 could be triggered by (i) the Windows devices rivaling the market positions of the Android-based leaders, (ii) by group revenues starting to grow again and operating margin (1.0% Moody's adjusted for 2011) reaching high single digit percent, while (iii) maintaining a net cash position (about EUR3.1 billion Moody's adjusted per end of 2011). For an outlook stabilization, (i) the Lumia family of devices needs to prove traction by gaining substantial market share and returning the Smart Devices segment to non-IFRS operating profit, (ii) the Mobile Phones segment should at least stabilize its sales volumes and return to a double-digit contribution margin, and (iii) cash consumption fall to marginal levels.
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