S&P Puts Nokia (NOK) on CreditWatch Positive
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Standard & Poor's Ratings Services said today it had placed on CreditWatch with positive implications its 'B+' long-term corporate credit ratings on Finnish mobile telecommunications equipment manufacturer Nokia Corp. (NYSE: NOK) and its fully-owned subsidiary Nokia Solutions and Networks B.V. (NSN; formerly Nokia Siemens Networks B.V.). The 'B' short-term corporate credit rating on Nokia was affirmed.
At the same time, we placed our 'B+' issue ratings on Nokia's senior unsecured notes on CreditWatch with developing implications. The recovery rating on these notes is '3', indicating our expectation of meaningful (50%-70%) recovery in the event of default.
We placed our 'B+' issue ratings on NSN's senior unsecured notes on CreditWatch with positive implications. The recovery rating on these notes is '4', indicating our expectation of average (30%-50%) recovery in the event of default.
The CreditWatch placements follow Nokia's announcement that it had entered an agreement with Microsoft Corp. to sell its Devices & Services (D&S) operations for €3.79 billion and to license its patents to Microsoft for 10 years for €1.65 billion. We could raise the long-term rating on Nokia after we have assessed the company's strategic plans, which we understand will be conducted over the next few months as we expect the deal to close in the first quarter of 2014, subject to regulatory approval.
Following the transaction, we could raise our assessment of Nokia's financial risk profile, which we currently assess as "aggressive," because we believe that the company's capital structure could strengthen and that its free operating cash flow (FOCF) generation will benefit from the deconsolidation of the cash-burning D&S division. Depending on Nokia's future strategy, we may also revise upward our assessment of Nokia's business risk profile, which we currently assess as "weak."
Nokia's capital structure would receive a significant boost from Microsoft's payment if the sale goes through. Pro forma the transaction and the acquisition of 50% of NSN, Nokia's consolidated net cash position on June 30, 2013, was €7.8 billion (compared with reported net cash of €4.1 billion), which is significantly higher than our previous estimate of €1.3 billion or above at the end of 2013. However, we expect that Nokia's actual cash position would be substantially lower, depending in particular on shareholder distributions.
After the transaction, Nokia's operations would primarily derive from NSN, whose FOCF we expect will be close to breakeven in 2013 (see "Nokia Siemens Networks B.V.," published on July 5, 2013, on RatingsDirect). We believe Nokia's other divisions, Here (location-based services and local commerce) and Advanced Technologies (patent portfolio), would contribute moderately to revenues and cash flow.
The CreditWatch on NSN reflects the CreditWatch placement on Nokia and that the transaction could improve NSN's leverage and shareholder policies. Furthermore, because we cap our rating on NSN at that on Nokia, we could consider raising the rating on NSN if we upgraded Nokia.
We aim to resolve the CreditWatch over the next few months, as we expect the transaction to close in the first quarter of 2014. At this stage we see potential for a one-notch upgrade of Nokia and NSN, based on the possibility of a substantially improved capital structure for Nokia and the group. However, our final rating decision will depend on:
* Management's strategic plans for Nokia and NSN and the business prospects for Nokia's shrunken operations;
* Nokia's and NSN's ability to generate sustainably positive FOCF; and
* Further visibility over the company's capital structure and financial policies.
We will also review our assessment of the parent-subsidiary relationship between Nokia and NSN.
We could lower the issue ratings on Nokia's existing senior debt by one or two notches, depending on the outcome of the CreditWatch resolution. This would most likely happen if, on completion of the transaction, Nokia's noteholders remain subordinated to the creditors at NSN, where we believe the majority of the value would reside.
The issue ratings would remain unchanged if:
* We raised the corporate credit rating on Nokia by one notch but perceived the debt's subordination as modest, resulting in modest (10%-30%) recovery prospects in case of default; or
* We affirmed the 'B+' credit rating on Nokia and the subordination were mitigated by our view of sufficient value remaining at the holding company to enable recovery prospects of at least 30%.
We could raise the issue ratings on the existing senior unsecured notes if we raised the corporate credit rating on Nokia and saw sufficient value remaining at the company for recovery prospects of at least 30% under a stress scenario.
At the same time, we placed our 'B+' issue ratings on Nokia's senior unsecured notes on CreditWatch with developing implications. The recovery rating on these notes is '3', indicating our expectation of meaningful (50%-70%) recovery in the event of default.
We placed our 'B+' issue ratings on NSN's senior unsecured notes on CreditWatch with positive implications. The recovery rating on these notes is '4', indicating our expectation of average (30%-50%) recovery in the event of default.
The CreditWatch placements follow Nokia's announcement that it had entered an agreement with Microsoft Corp. to sell its Devices & Services (D&S) operations for €3.79 billion and to license its patents to Microsoft for 10 years for €1.65 billion. We could raise the long-term rating on Nokia after we have assessed the company's strategic plans, which we understand will be conducted over the next few months as we expect the deal to close in the first quarter of 2014, subject to regulatory approval.
Following the transaction, we could raise our assessment of Nokia's financial risk profile, which we currently assess as "aggressive," because we believe that the company's capital structure could strengthen and that its free operating cash flow (FOCF) generation will benefit from the deconsolidation of the cash-burning D&S division. Depending on Nokia's future strategy, we may also revise upward our assessment of Nokia's business risk profile, which we currently assess as "weak."
Nokia's capital structure would receive a significant boost from Microsoft's payment if the sale goes through. Pro forma the transaction and the acquisition of 50% of NSN, Nokia's consolidated net cash position on June 30, 2013, was €7.8 billion (compared with reported net cash of €4.1 billion), which is significantly higher than our previous estimate of €1.3 billion or above at the end of 2013. However, we expect that Nokia's actual cash position would be substantially lower, depending in particular on shareholder distributions.
After the transaction, Nokia's operations would primarily derive from NSN, whose FOCF we expect will be close to breakeven in 2013 (see "Nokia Siemens Networks B.V.," published on July 5, 2013, on RatingsDirect). We believe Nokia's other divisions, Here (location-based services and local commerce) and Advanced Technologies (patent portfolio), would contribute moderately to revenues and cash flow.
The CreditWatch on NSN reflects the CreditWatch placement on Nokia and that the transaction could improve NSN's leverage and shareholder policies. Furthermore, because we cap our rating on NSN at that on Nokia, we could consider raising the rating on NSN if we upgraded Nokia.
We aim to resolve the CreditWatch over the next few months, as we expect the transaction to close in the first quarter of 2014. At this stage we see potential for a one-notch upgrade of Nokia and NSN, based on the possibility of a substantially improved capital structure for Nokia and the group. However, our final rating decision will depend on:
* Management's strategic plans for Nokia and NSN and the business prospects for Nokia's shrunken operations;
* Nokia's and NSN's ability to generate sustainably positive FOCF; and
* Further visibility over the company's capital structure and financial policies.
We will also review our assessment of the parent-subsidiary relationship between Nokia and NSN.
We could lower the issue ratings on Nokia's existing senior debt by one or two notches, depending on the outcome of the CreditWatch resolution. This would most likely happen if, on completion of the transaction, Nokia's noteholders remain subordinated to the creditors at NSN, where we believe the majority of the value would reside.
The issue ratings would remain unchanged if:
* We raised the corporate credit rating on Nokia by one notch but perceived the debt's subordination as modest, resulting in modest (10%-30%) recovery prospects in case of default; or
* We affirmed the 'B+' credit rating on Nokia and the subordination were mitigated by our view of sufficient value remaining at the holding company to enable recovery prospects of at least 30%.
We could raise the issue ratings on the existing senior unsecured notes if we raised the corporate credit rating on Nokia and saw sufficient value remaining at the company for recovery prospects of at least 30% under a stress scenario.
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