Moody's Rate Nokia Siemens' CFR at B2, Outlook Positive (NOK) (SI)
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Moody's Investors Service has assigned a B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to Nokia Siemens Networks B.V. ("NSN"). Concurrently, Moody's has assigned a B2/loss-given default (LGD) 4 rating to the company's EUR600 million worth of senior notes. The outlook on all ratings is positive.
RATINGS RATIONALE
Our assessment of NSN reflects its (i) large scale of operations and broad geographic presence, (ii) its strong and rapid turnaround as evidenced by an improvement in the recurring operating income margin to 6.1% in fiscal year 2012 (from 2.5% in 2011) helped by a successful implementation of deep and still ongoing restructuring measures including a strategic refocusing of its operations on wireless technologies, (iii) the group's solid and improving market positioning with recent market share gains leading NSN to remain one of the three largest providers globally for wireless equipment in 2012, (iv) the fact that about half of group's revenues are generated by the Service business with a substantial share of contracts with earnings visibility and (v) NSN's solid liquidity position supported by a EUR1.0 billion capital increase in fiscal year 2011 as well as EUR1.4 billion positive free cash flow on the back of a EUR1.0 billion working capital release in fiscal year 2012, which, however, we believe cannot be repeated at the same magnitude in 2013. We also positively note (vi) NSN's strong improvement in leverage metrics to an estimated 2.2x adjusted debt/EBITDA before restructuring costs in FY2012.
On the negative side the rating takes into account (i) the very price competitive telecom equipment market with a high single-digit price erosion as expected by Moody's and NSN's challenge to mitigate this pricing pressure through market share gains, the exit of modestly profitable service contracts, procurement cost improvements, a more cost efficient product design and further restructuring measures, (ii) uncertainty over the sustainability of NSN's current level of profitability, (iii) the weak track record of NSN and the fact that the group is still in a period of transition with further restructuring, asset disposals and management changes and (iv) potential likely changes in shareholders and, hence, business and financial strategy.
Moody's positive outlook for the ratings assumes stable revenues excluding asset disposals and a modest margin improvement (before restructuring costs) to well above 5% going forward. For an upgrade, we also expect that NSN will generate free cash flow of 10-20% of gross adjusted debt on a sustainable basis, including normalising, i.e strongly declining restructuring costs. During this period of restructuring, we expect the company to maintain liquidity cushions in form of freely available cash and the undrawn portion of the RCF -- with comfortable covenant headroom - of at least EUR2.0 billion. Sustainable achievement of these metrics could lead to an upgrade over the next couple of quarters.
As of 31 December 2012 NSN has a good liquidity over the next twelve months. We expect total cash sources of at least EUR2.2 billion comprising a readily available cash balance of EUR792 million ( excluding EUR100-150 million trapped cash and an undisclosed amount of cash which is available for corporate purposes but not immediately accessible), EUR706 million available for sale investments, a EUR750 million undrawn long-term revolving credit facility with sufficient covenant headroom as well as at least break-even free cash flow.
Over the same period Moody's expects cash requirements of around EUR634 million including EUR229 million debt maturities and EUR405 million working cash for day-to-day operations.
The envisaged issuance of the EUR600 million senior unsecured notes with a 5-7 year tenor should extend NSN's debt maturity profile with the majority of debt coming due between 2018 and 2020. The rating incorporates possible increases of the bond issuance beyond EUR600 million, depending on market conditions.
STRUCTURAL CONSIDERATIONS
The senior unsecured notes are issued by NSN Finance B.V. and are guaranteed by NSN B.V. and NSN Oy, the group's main operating subsidiary. The existing loans provided by European Investment Bank, Nordic Investment Bank as well as the revolving credit facility are all issued by NSN Finance B.V. and guaranteed by NSN Oy. Given the upstream guarantee from NSN Oy these creditors also rank in line with local bank debt provided by Firstrand Bank Limited, a Varma Pension Loan as well as drawn uncommitted local lines which are all issued by operating entities. Only a EUR32 million OTE loan and NSN's EUR82 million commercial paper outstanding rank behind senior creditors as they are issued by NSN Finance B.V. but do not benefit from any upstream guarantees of operating subsidiaries.
Trade creditors to NSN Oy rank in line with the senior unsecured notes, European Investment Bank loan, Nordic Investment Bank loan and revolving credit facility as NSN Oy is the guarantor of these creditors. All other trade creditors are in a preferred position given that their claims are not limited to NSN Oy so that they benefit from a better coverage of their claims. Hence, they rank ahead of all other bank debt and the senior unsecured notes.
Moody's has rated the senior unsecured notes issued by NSN Finance B.V. at the same level of the Corporate Family Rating reflecting the solid positioning of the rating in the B2 rating category and our assumption that NSN Oy holds the bulk of the group's intellectual property, and despite the structural subordination of the notes to a significant amount of trade payables held at the level of operating subsidiaries other than NSN Oy. Given the structural subordinated position of the notes relative to the trade payables sitting at the non-guaranteeing operating companies, an upgrade of the CFR might not necessarily lead to an upgrade of the notes at the same time.
We assume that pension obligations as well as lease rejection claims are located at operating subsidiary level. Hence, they rank in line with the senior unsecured notes and all other creditors except for the OTE loan and NSN's commercial paper programme.
As we treat the group's EUR2.5 billion preferred shares as equity we have not considered them in our Loss Given Default analysis.
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.
Nokia Siemens Networks, B.V., domiciled in the Netherlands, is a manufacturer of telecommunications infrastructure focused on mobile broadband where it belongs to the three biggest providers worldwide besides Ericsson (A3, negative) and Huawei (unrated). The group is a joint-venture owned by Nokia (NYSE: NOK) (Ba3, negative) and Siemens AG (NYSE: SI) (Aa3, stable). Over the last two years NSN has been going through a period of material restructuring including headcount reductions of 15,300 people as well as significant asset disposals. In the last financial year ending on 31 December 2012 the group had net sales of EUR13.4 billion and an operating profit of a negative EUR741 million including restructuring charges and a positive EUR822 million before restructuring charges.
RATINGS RATIONALE
Our assessment of NSN reflects its (i) large scale of operations and broad geographic presence, (ii) its strong and rapid turnaround as evidenced by an improvement in the recurring operating income margin to 6.1% in fiscal year 2012 (from 2.5% in 2011) helped by a successful implementation of deep and still ongoing restructuring measures including a strategic refocusing of its operations on wireless technologies, (iii) the group's solid and improving market positioning with recent market share gains leading NSN to remain one of the three largest providers globally for wireless equipment in 2012, (iv) the fact that about half of group's revenues are generated by the Service business with a substantial share of contracts with earnings visibility and (v) NSN's solid liquidity position supported by a EUR1.0 billion capital increase in fiscal year 2011 as well as EUR1.4 billion positive free cash flow on the back of a EUR1.0 billion working capital release in fiscal year 2012, which, however, we believe cannot be repeated at the same magnitude in 2013. We also positively note (vi) NSN's strong improvement in leverage metrics to an estimated 2.2x adjusted debt/EBITDA before restructuring costs in FY2012.
On the negative side the rating takes into account (i) the very price competitive telecom equipment market with a high single-digit price erosion as expected by Moody's and NSN's challenge to mitigate this pricing pressure through market share gains, the exit of modestly profitable service contracts, procurement cost improvements, a more cost efficient product design and further restructuring measures, (ii) uncertainty over the sustainability of NSN's current level of profitability, (iii) the weak track record of NSN and the fact that the group is still in a period of transition with further restructuring, asset disposals and management changes and (iv) potential likely changes in shareholders and, hence, business and financial strategy.
Moody's positive outlook for the ratings assumes stable revenues excluding asset disposals and a modest margin improvement (before restructuring costs) to well above 5% going forward. For an upgrade, we also expect that NSN will generate free cash flow of 10-20% of gross adjusted debt on a sustainable basis, including normalising, i.e strongly declining restructuring costs. During this period of restructuring, we expect the company to maintain liquidity cushions in form of freely available cash and the undrawn portion of the RCF -- with comfortable covenant headroom - of at least EUR2.0 billion. Sustainable achievement of these metrics could lead to an upgrade over the next couple of quarters.
As of 31 December 2012 NSN has a good liquidity over the next twelve months. We expect total cash sources of at least EUR2.2 billion comprising a readily available cash balance of EUR792 million ( excluding EUR100-150 million trapped cash and an undisclosed amount of cash which is available for corporate purposes but not immediately accessible), EUR706 million available for sale investments, a EUR750 million undrawn long-term revolving credit facility with sufficient covenant headroom as well as at least break-even free cash flow.
Over the same period Moody's expects cash requirements of around EUR634 million including EUR229 million debt maturities and EUR405 million working cash for day-to-day operations.
The envisaged issuance of the EUR600 million senior unsecured notes with a 5-7 year tenor should extend NSN's debt maturity profile with the majority of debt coming due between 2018 and 2020. The rating incorporates possible increases of the bond issuance beyond EUR600 million, depending on market conditions.
STRUCTURAL CONSIDERATIONS
The senior unsecured notes are issued by NSN Finance B.V. and are guaranteed by NSN B.V. and NSN Oy, the group's main operating subsidiary. The existing loans provided by European Investment Bank, Nordic Investment Bank as well as the revolving credit facility are all issued by NSN Finance B.V. and guaranteed by NSN Oy. Given the upstream guarantee from NSN Oy these creditors also rank in line with local bank debt provided by Firstrand Bank Limited, a Varma Pension Loan as well as drawn uncommitted local lines which are all issued by operating entities. Only a EUR32 million OTE loan and NSN's EUR82 million commercial paper outstanding rank behind senior creditors as they are issued by NSN Finance B.V. but do not benefit from any upstream guarantees of operating subsidiaries.
Trade creditors to NSN Oy rank in line with the senior unsecured notes, European Investment Bank loan, Nordic Investment Bank loan and revolving credit facility as NSN Oy is the guarantor of these creditors. All other trade creditors are in a preferred position given that their claims are not limited to NSN Oy so that they benefit from a better coverage of their claims. Hence, they rank ahead of all other bank debt and the senior unsecured notes.
Moody's has rated the senior unsecured notes issued by NSN Finance B.V. at the same level of the Corporate Family Rating reflecting the solid positioning of the rating in the B2 rating category and our assumption that NSN Oy holds the bulk of the group's intellectual property, and despite the structural subordination of the notes to a significant amount of trade payables held at the level of operating subsidiaries other than NSN Oy. Given the structural subordinated position of the notes relative to the trade payables sitting at the non-guaranteeing operating companies, an upgrade of the CFR might not necessarily lead to an upgrade of the notes at the same time.
We assume that pension obligations as well as lease rejection claims are located at operating subsidiary level. Hence, they rank in line with the senior unsecured notes and all other creditors except for the OTE loan and NSN's commercial paper programme.
As we treat the group's EUR2.5 billion preferred shares as equity we have not considered them in our Loss Given Default analysis.
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.
Nokia Siemens Networks, B.V., domiciled in the Netherlands, is a manufacturer of telecommunications infrastructure focused on mobile broadband where it belongs to the three biggest providers worldwide besides Ericsson (A3, negative) and Huawei (unrated). The group is a joint-venture owned by Nokia (NYSE: NOK) (Ba3, negative) and Siemens AG (NYSE: SI) (Aa3, stable). Over the last two years NSN has been going through a period of material restructuring including headcount reductions of 15,300 people as well as significant asset disposals. In the last financial year ending on 31 December 2012 the group had net sales of EUR13.4 billion and an operating profit of a negative EUR741 million including restructuring charges and a positive EUR822 million before restructuring charges.
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