Nokia Debt Ratings Downgraded on NSN Buyout Deal
Published on: 7th Jul 2013
By: Ian Mansfield
Standard Poor's Ratings Services has lowered Nokia's long term debt rating to 'B ' from 'BB ' and affirmed its 'B' short term corporate credit rating. The outlook is stable.
The rating action reflects Nokia's acquisition of the 50% stake in Nokia Siemens Networks (NSN) from Siemens for EUR1.7 billion, making Nokia the 100% owner. Nokia's strong balance sheet, which S&P views as an offsetting factor to Nokia's cash burn and supportive to the rating, will weaken following the acquisition. The debt ratings agency also factors in the company's estimate cash burn of EUR300 million-EUR800 million during the second quarter of 2013.
The ratings reflect their revised assessment of Nokia's financial risk profile assessment to "aggressive" from "significant." They continue to assess its business risk profile as "weak."
S&P said that it understands that the deal could close in the third quarter of 2013, subject to regulatory approval. As Nokia was already fully consolidating NSN, the transaction will have no positive impact on Nokia's reported profitability or cash flow measures, but it will weaken its net cash position. S&P has lowered it estimate of Nokia's net cash to EUR1.3 billion or above at end-2013 from EUR3 billion or above previously.
The ratings agency continues to think free operating cash flow (FOCF) will be negative in the second half of 2013 and for the full year, including the cash restructuring outlays after Nokia reported cash burn of at least €300 million during the second quarter. They also continue to be concerned about Nokia's ability to sustainably generate positive FOCF--especially in its Devices & Services (D&S) division, given the low visibility on revenues and margins and its small market share in smartphones. Finally, they also think NSN's FOCF could fluctuate, notably because of marked swings in working capital. So, they think Nokia may struggle to return to positive free cash generation in 2014.
The stable outlook reflects its expectation that Nokia will maintain a strong net cash position over the next 12 months, despite our anticipation of negative FOCF.
S&P could raise the ratings if FOCF gradually and sustainably became positive. They think this will require Nokia's market share in the smartphone segment to increase and adjusted consolidated EBITDA margin to return durably to positive territory.
They could lower the ratings if Nokia failed to gain smartphone market share, leading to continuing negative FOCF prospects in 2014 and beyond. This would further reduce Nokia's net cash position.