Moody's: Capital Injection to Nokia-Siemens Networks is Credit Negative for Nokia

Published on: 3rd Oct 2011

­Moody's Investors Service has warned that the decision by Nokia and Siemens to inject EUR500 million each into their network infrastructure joint-venture could have a negative impact on Nokia's debt ratings.

Moody's said that the decision reduces cash balances at the parent level, which are key to its rating. However, Nokia's cash cushion of EUR9.4 billion as of June 2011 remains substantial.

While Nokia and Siemens jointly own NSN, Nokia fully consolidates the joint venture. As such, any recapitalisation or funding of NSN by Nokia and Siemens technically adds cash to Nokia's consolidated accounts. However, at the same time, it operationally reduces Nokia's liquidity, given its own funding contribution.

As a result, although the EUR1 billion capital injection is evenly spread between Nokia and Siemens, the credit implications are much more pronounced for Nokia, whose liquidity is a key rating factor.

Nokia and Siemens created NSN in 2007 when they merged their communication networks and services operations. NSN is now among the top five vendors of telecommunications equipment, with sales of around EUR6.8 billion in first-half 2011. However, Moody's notes that the entrance of Chinese players, particularly Huawei, has intensified price competition and largely eroded the cost savings NSN hoped to realize. Since its start, the joint venture has hardly turned a profit and the ratings agency estimates that it has consistently consumed cash.

The parent companies have provided support to NSN since its inception, not only in the form of technology and administrative infrastructure, but also financially through the conversion to equity of EUR1.5 billion in shareholder loans in 2010. Nokia and Siemens recently reiterated their commitment to the joint venture after they failed to attract new investors. Moody's expect the two companies to accelerate their restructuring of NSN. They also expect that more cash contributions will be necessary to realize meaningful profits and facilitate a refinancing of NSN's revolving credit facility, which expires in June 2012, hence the need for the announced capital injection.

Consequently, Moody concluded that it will continue comparing the past and projected cash flow of Nokia's core business to its liquidity position.

 

Tags: [nokia siemens networks]  [nokia]  [siemens]