Moody’s Investors Service today downgraded the senior debt ratings of Nokia to Baa2 from triple-A. Moody’s also affirmed Nokia’s ratings for short-term debt at P-2. All ratings have a negative outlook.
Moody’s cited a “severe weakening of Nokia’s business position from one of clear leadership previously” as the reason for the downgrade.
“This deterioration has been caused by a loss of competitiveness of Nokia’s Symbian-based smartphone portfolio and the transition of its operating systems to the Windows Phone platform which we expect to take until the second half 2012 to fully complete,” wrote Wolfgang Draack, a Moody’s senior vice president and lead analyst for Nokia, in a statement.
Draack said increasing price pressure and gaps in the company’s mobile phone portfolio that are now being filled also added to the decision to downgrade Nokia’s rating.
Moody’s expects the damage to be stemmed, saying that further erosion of Nokia’s sales volumes and profit margins should be limited as a result of a range of new phones recently introduced and shipped, such as the dual-SIM card mobile phone models and smartphones on the upgraded Symbian-Anna platform, as well as measures to control cost and maintain the company’s good operating flexibility.
Nokia has maintained a strong liquidity position and capital structure, which should support the transition process by covering possible cash burn. Moody’s said it expects Nokia to contain its cash consumption over the coming quarters until the Windows Phone-based devices find traction, enabling the company to maintain a substantial cash position, net of reported debt.
Kendra Petrone, a spokeswoman for Nokia, said the company acknowledges Moody’s announcement. Petrone notes that Moody’s pointed to Nokia Group’s “exceptional liquidity profile,” as well as the company’s history of maintaining a conservative financial policy, which targets a strong balance sheet.
“Moody’s rating action will not have a material impact on our current financing costs,” Petrone said, adding that Nokia’s credit ratings are underscored by its strong market position and IPR portfolio, as well as solid liquidity and capital structure, which includes gross cash of $13.6 billion and net cash of $5.6 billion at the end of the second quarter.
Moody’s presented two possible scenarios for Nokia. One assumes that the second quarter of 2011 was actually the low point in Nokia’s performance trend and could lead to maintenance of the Baa2 rating.
Another scenario assumes that Nokia may not be able to fully stem the erosion of revenues by selling materially less than 65 million mobile phones per quarter or less than 15 million smartphones, which could generate modest operating losses. Moody’s also expressed concern should Nokia experience any lags in production or acceptance by end users of the company’s impending Windows Phone 7 devices.
Shares of Nokia were down 2 percent to $5.77 in early morning trading.