(The following statement was released by the rating agency)
Aug 15 -
-- Finnish mobile telecommunications equipment manufacturer Nokia Corp.'s
second-quarter results and guidance for the third quarter of 2012 are lower
than we previously expected.
-- We now anticipate net cash falling to less than EUR3 billion by year-end
2012, including cash restructuring outflows.
-- We are lowering our long-term rating on Nokia to 'BB-' from 'BB+' and
affirming our 'B' short-term rating.
-- The negative outlook reflects the possibility of another downgrade if
Nokia fails to stabilize its margins and significantly cut its cash losses.
On Aug. 15, 2012, Standard & Poor's Ratings Services lowered its long-term
corporate credit rating on Finnish mobile telecom equipment manufacturer Nokia
Corp. to 'BB-' from 'BB+' and affirmed its 'B' short-term corporate credit
rating. The outlook is negative.
At the same time, we lowered our issue ratings on Nokia's unsecured debt to
'BB-' from 'BB+'. The recovery rating on this debt remains at '3', reflecting
our expectation of meaningful (50%-70%) recovery prospects in the event of a
The rating actions reflect a downward revision of our estimates of revenues
and profitability for Nokia's smartphone operations in 2012 and 2013. We have
subsequently also revised our cash flow assumptions, including the impact from
Nokia's restructuring of its Devices and Services division. In line with our
criteria, we have therefore revised our assessment of Nokia's business risk
profile to "weak" from "fair" and that of the financial risk profile to
"significant" from "intermediate".
We now assume that Nokia's smartphone operations will post lower revenues than
we previously anticipated over the coming quarters. We also believe that
consolidated revenues for 2012 will show a decline of 16%-19% and that the
company will post a non-IFRS operating loss (that is, not under International
Financial Reporting Standards) before restructuring costs.
Nokia's revenues could stabilize in 2013 if growth from Lumia smartphones is
able to offset the revenue decline from smartphones using the Symbian
operating system and, to a lesser extent, from mobile phones. However, we
still foresee Nokia posting a low single-digit non-IFRS operating margin in
We have lowered our volume assumptions for Nokia's smartphones because the
company's market share continues to decline. Nokia held 7.0% of the smartphone
market in the second quarter of 2012, down from 12.6% in the fourth quarter of
2011, according to market research company Strategy Analytics. Because Symbian
devices still represent the largest portion of Nokia's sales by volume, we
think Nokia's market share could decline further. We have also lowered our
price assumptions for Nokia's smartphones following the price decline of Lumia
phones to EUR186 in the second quarter of this year, compared with EUR220 in the
first quarter. To defend its market share, we believe that Nokia might lower
the price of Lumia phones further in the coming quarters. We expect Nokia to
launch new models, notably those based on the Windows Phone 8 operating
system, but we think it could take some time before this can help stabilize
We have also incorporated the recent drop in the company's gross margin for
the smartphone segment to 1.7% in the second quarter of 2012, which resulted
partly from EUR220 million of inventory-related allowances for Lumia, Symbian,
and MeeGo devices. Depending on volumes sold in the future, we think that
additional charges could affect future gross margins. Nokia's restructuring of
its Devices and Services division and Telecom Network Equipment division (NSN)
now targets a combined cost reduction of EUR3.3 billion by the end of 2013.
However, we expect that this will only partly offset declining revenues and we
expect the group's non-IFRS operating margins to remain negative over the
In our updated base-case assessment, we now expect Nokia to generate negative
consolidated free operating cash flow (FOCF) of about minus EUR2 billion in
2012, and slightly negative FOCF in 2013. This FOCF forecast incorporates our
assumption of weaker profitability and the company's plan for cash
restructuring outflows of EUR1.75 billion over the next 18 months. We continue
to view Nokia's cash position as a positive factor, but we expect net cash to
fall to less than EUR3 billion by Dec. 31, 2012, from EUR4.2 billion on June 30,
2012. The sharp decline includes cash restructuring outflows and excludes the
possible benefits from divestments.
The short-term rating is 'B'. We assess the group's liquidity as "strong," as
defined in our criteria. In our opinion, the group's strong liquidity can more
than cover its needs over the near term, even if EBITDA were to decline
sharply for a limited period or if NSN were unable to draw on a EUR750 million
multicurrency revolving credit facility (RCF). The group has good
relationships with its banks, in our view.
Nokia's main liquidity sources over the next 12 months comprise:
-- Our assumption of consolidated surplus cash of about EUR5 billion. As of
June 30, 2012, the group's liquid assets totaled EUR9.4 billion, including EUR1.9
billion in cash and EUR7.5 billion in short-term marketable securities;
-- An undrawn committed RCF of EUR1.5 billion maturing in March 2016, with
no financial covenants; and
-- NSN's EUR750 million RCF, maturing in June 2015, which contains
maintenance financial covenants. We believe that headroom under NSN's
covenants should be adequate over the next few quarters.
Against these sources, we anticipate the following liquidity uses:
-- Negative group FOCF of about EUR1 billion-EUR1.5 billion in the second
half of 2012 and slightly negative FOCF in 2013, including cash restructuring
outlays relating to NSN and the Devices and Services division; and
-- Debt amortization slightly in excess of EUR1 billion over the next 12
months, which primarily relates to debt maturities at NSN, and no other debt
maturities before 2014.
The 'BB-' issue rating on Nokia's senior unsecured notes is at the same level
as the corporate credit rating. The recovery rating on these instruments
remains at '3,' indicating our expectation of meaningful (50%-70%) recovery
prospects for debtholders in the event of a payment default. In line with our
recovery criteria, the recovery ratings on unsecured debt issued by corporate
entities with a corporate credit rating of 'BB-' or higher are generally
capped at '3' to account for the possibility that their recovery prospects are
at greater risk of being impaired by the issuance of additional priority or
pari passu debt before default.
The recovery ratings and issue ratings are underpinned by our valuation of the
group as a going concern and by Nokia's base in Finland, which we view as
having a relatively creditor-friendly insolvency regime. However, the ratings
factor in the notes' unsecured nature and that the documentation contains
typical investment-grade protection. All of the group's debt ranks pari passu
and is issued on an unsecured basis, with limited documentary protection. The
noteholders benefit from a negative-pledge clause, with notable carve-outs to
To determine recoveries, we simulate a hypothetical default scenario. In our
view, a default of the company would most likely be due to a continued decline
in revenues and market share, inability to reduce costs, continuous
significant use of cash to invest in new technologies, and no improvement in
operating performance. We have revised our hypothetical default year to 2016
from 2019, as a result of the rapidly deteriorating revenue and operating
margins at Nokia's Devices and Services division. At the hypothetical point of
default, we envisage annual EBITDA to have declined to about EUR695 million.
Our stressed enterprise valuation at our hypothetical point of default in 2016
is about EUR2.8 billion, equivalent to a stressed EBITDA multiple of 4.0x. After
deducting priority liabilities of EUR320 million, which mainly comprise
enforcement costs, other interest-bearing liabilities, and about 50% of the
group's current pension deficit, we see about EUR2.5 billion remaining for
unsecured debtholders. We envisage about EUR5 billion of debt outstanding at
default (including six months of prepetition interest), assuming that debt
maturing in 2014 is refinanced and the EUR1.5 billion RCF maturing in 2016 is
fully drawn at default.
In calculating Nokia's stressed enterprise value, we exclude NSN, which we
view as a stand-alone entity with its own financing arrangements and no
guarantees from Nokia. We also exclude debt relating to NSN from our
postdefault calculations. If value were to be obtained from NSN at our
hypothetical point of default, it might enhance recovery prospects. However,
this is unlikely to have an impact on the recovery rating, which is capped at
'3' because the notes are unsecured.
The negative outlook reflects the possibility of a downgrade over the next 12
months if the non-IFRS operating margin of Nokia's Devices and Services
division or consolidated FOCF remains significantly negative, since this would
reduce Nokia's net cash position further. This could be the case for instance
if revenues from Lumia smartphones did not increase significantly during 2013
or if margins deteriorated further.
We could revise the outlook to stable if revenues in the Devices and Services
division stabilized and non-IFRS operating margins returned to breakeven.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
-- Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Downgraded; Ratings Affirmed
Corporate Credit Rating BB-/Negative/B BB+/Negative/B
Senior Unsecured BB- BB+
Recovery Rating 3 3