Nokia Downgraded by Debt Ratings Agency
Fitch Ratings has downgraded Nokia's Long-term Issuer Default Rating (IDR) and senior unsecured rating by two levels to 'BBB-' from 'BBB+' respectively. The Short-term IDR is also downgraded to 'F3'. The Outlook on the Long-term IDR is Negative.
The BBB- rating is classed as "Lower medium grade" and is just one notch above being non-investment grade speculative.
"The downgrade and Negative Outlook reflect the serious concerns Fitch has about the accelerating pace of the market share erosion for Nokia's Symbian handset business. The pace of deterioration has picked-up since Nokia decided to switch to an alternative operating system and it appears consumers are deserting these legacy handsets for cheaper Android (Google's operating system) versions or high-end Android or Apple smart phones," says Stuart Reid, Senior Director in Fitch's TMT team in London.
The cash flow effect of the rapid deterioration in key performance indicators such as (average selling price and handset market share is being reflected in group margins which have fallen to 6.8% in 1Q11, down from 8.6% in the past year. Company guidance released last week indicated only break-even margins for Q211 and a lack of visibility on operating margins for YE 2011.
This guidance is materially worse than Fitch's previous rating case forecast.
By way of some sensitivity analysis, a break even margin for the full year would spike Fitch's gross leverage measure for Nokia to 5x at YE 2011, a level inconsistent with mid -'BBB' companies with this level of volatility on cash flow.
Fitch's longer term view is likely to be heavily impacted by the lack of a tested new product portfolio based on the Windows operating system, which is only expected to be in place well into 2012. This places an uncomfortably long phase of pressure on the existing handset business and raises the spectre of further cash flow deterioration and increased leverage metrics beyond YE 2011. Moreover the execution risk around the successful launch of a new Windows-based product suite against highly competitive and established players such as Samsung, HTC and Apple has now greatly increased.
Fitch recognises Nokia's balance sheet cash levels are currently strong for the new rating level.
However the benefit of large current cash balances is discounted heavily in the light of operational weakness of this nature. Mature companies in fast-moving sectors can feel threatened to rapidly spend accumulated cash in a number of ways when faced with step changes in market-share dynamics. The discount Fitch applies to Nokia's cash position reflects this generic concern and is not indicative of any specific scenario or anticipated corporate event.
Fitch would expect to revise the Outlook back to Stable only upon clear evidence that the current negative operating margin trends have been stabilised with a degree of sustainable profitability achieved, combined with positive market reaction to new Windows-based products, the first of which, Nokia announced last week, should be launched by the end of 2011.