Moody's Raises Nokia (NOK) to 'Ba2'; Cites New Strategy, Capital Optimization Program

May 12, 2014 12:45 PM EDT
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Moody's Investors Service has today upgraded to Ba2 from B1 the corporate family rating (CFR) and to Ba2-PD from B1-PD the probability of default rating (PDR) of Nokia Oyj (NYSE: NOK), following the announcement of its new strategy and capital structure optimisation programme, the completed divestment of its mobile handset operations, and the anticipated stabilisation of its core Nokia Siemens Networks business, renamed Networks. The outlook on the ratings is stable. Concurrently, Moody's withdrew the B1 CFR and B1-PD PDR of Nokia Solutions and Networks B.V. (NSN).

Moody's has also upgraded to Ba2 and (P)Ba2 from B1 and (P)B1 the ratings of Nokia's senior unsecured notes and MTN programme ratings respectively, and to Ba2 from B1 the ratings of Nokia Solutions and Networks Finance B.V.'s EUR800 million of senior notes. Nokia's and Nokia Finance International B.V.'s short-term senior unsecured ratings of NP/(P)NP were affirmed.

"We are upgrading Nokia's ratings because Nokia announced that it will remain focused on its existing businesses and reduce gross debt, thus positively resolving the uncertainties reflected in the previous developing outlook on the rating" says Roberto Pozzi, a Moody's Vice President -- Senior Analyst and lead analyst for Nokia. "The upgrade also reflects our view that the performance of the company's core Networks business will stabilise in the next 12-18 months, despite still intense competition across the communication equipment industry, and that its leverage will improve to around 2x on a Moody's-adjusted basis over the same period, as the company executes its capital structure optimisation programme. Moody's also expects that Nokia's liquidity will remain solid upon completion of the plan."

RATINGS RATIONALE

Nokia's Ba2 corporate family rating reflects the company's good competitive position in the mobile networks industry where we expect the ongoing growth of data and video traffic over communications networks will support moderate growth. The rating is constrained by the company's somewhat smaller scale and narrower market focus relative to the industry leaders Telefonaktiebolaget LM Ericsson (Baa1 stable) and Huawei (unrated), and by the intensity of competition, volatility and cyclicality of the mobile network equipment industry. The rating also considers Nokia's solid liquidity profile (EUR 5.5 billion of cash and liquid investments pro-forma for the planned capital structure optimisation program), increasing free cash flow generation that we expect will exceed EUR 300 million in 2015, and moderate financial leverage.

After completion of ongoing divestments, we expect that Nokia's revenues will increase in mid-single digits and that operating margins will stabilise in low double-digits over the next 12-18 months, driven by modestly improving demand and market share gains in 4G/LTE and other industry segments, and by the high margin intellectual property licensing business which continues to be part of the Nokia Group. We anticipate that Nokia will maintain a solid credit profile over the same period, with Debt to EBITDA of approximately 2x, free cash flow to Debt exceeding 10% and an EBIT interest coverage above 6x (all ratios are Moody's adjusted) as the company executes its capital structure optimisation program. Nokia recently announced the plan to return EUR 3 billion to shareholders through dividends and share repurchases and to reduce gross debt by EUR 2 billion over the next two years.

Moody's anticipates that the execution of Nokia's recently announced capital structure optimisation programme will allow the company to achieve a solid credit profile. The recently announced plan includes the return of around EUR3 billion to shareholders through dividends and share repurchases as well as a EUR2 billion reduction in gross debt over the next two years.

Factors constraining the rating are the company's smaller scale and narrower business focus compared to industry leaders, the intensity of competition, volatility and cyclicality of the mobile network equipment industry, and the need for the company to establish a track record in terms of performance and, particularly, free cash flow generation. On the other hand Nokia's Technologies business (particularly its intellectual property licensing) and it's HERE location business give further cash flow and business diversification to the company.

Moody's expects that Nokia will maintain a strong liquidity profile even after considering the company's plan to return EUR3 billion to shareholders through 2015 through dividends and share repurchases. Pro-forma for the recent sale of its handset business, Nokia had EUR10.5 billion in cash and marketable securities as of March 2014 and Moody's expects that the company will generate approximately break-even FCF in 2014, impacted by EUR 450 million the cash outflows related to restructuring, and over EUR300 million of FCF in 2015. The group has no major debt maturities until a EUR750 million convertible bond matures in 2017 , followed by a EUR450 million bond issued by Networks (former NSN) in 2018, a EUR500 million and a USD1,000 million bond in 2019.

RATIONALE FOR STABLE OUTLOOK

The stable rating outlook reflects Moody's expectations that Nokia will continue to maintain a good competitive position against larger competitors, such as Ericsson and Huawei, while maintaining a robust liquidity profile and modest financial leverage, which will allow the company to sustain investments in product development.

WHAT COULD CHANGE THE RATING -- UP/DOWN

Nokia's ratings could be raised if the company sustainably increased market share, as evidenced by revenue growth exceeding that of its main competitors, while maintaining good profitability, moderate leverage and sustainable positive free cash flow generation.

A loss of market share or a decline in profitability could create negative rating pressure. Also, negative rating pressure could develop if the company leverage deteriorated as a result of a more aggressive financial policy, as evidenced by Debt to EBITDA sustained above 3x. The current rating also factors in the maintenance of a solid liquidity position.

Following the sale of the handset operations to Microsoft (completed in late April 2014), Nokia Oyj (Nokia) operates three businesses: Networks, HERE and Technologies, with revenues of about EUR12.7 billion in 2013. Networks (87% of revenues - continued operations only (i.e., excluding handsets)) is a leading provider of radio access/mobile broadband wireless equipment and services to carriers. It provides mobile, fixed and converged network technologies as well as services, mainly to telecom carriers. HERE (7% of revenues) provides digital map data and location-based content and services for automotive navigation systems but also for other applications. Technologies (6% of group revenues) is a licensing, brand and technology development business with around 30,000 patents.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was the Global Communications Equipment Industry published in June 2008. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.



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