Bloomberg News

Nokia Debt Cut to Lowest Investment Grade by Fitch

June 07, 2011

(Corrects description of S&P, Moody’s ratings in second paragraph.)

June 7 (Bloomberg) -- Nokia Oyj, the world’s biggest maker of mobile phones, had its debt rating slashed to the lowest investment grade at Fitch Ratings because of the declining market share of the company’s Symbian smartphones.

The long-term rating was cut by two steps to BBB- with a negative outlook, Fitch said today. Standard & Poor’s and Moody’s Investors Service, which both lowered Espoo, Finland- based Nokia’s rating this year, rank the debt at the fourth- lowest of their 10 investment-grade ratings.

Nokia on May 31 slumped to the lowest price in 13 years in Helsinki trading after cutting its forecasts for the devices and services unit on lower prices and competition from Google Inc. and Apple Inc.’s iPhone. Chief Executive Officer Stephen Elop is readying a line of phones based on Microsoft Corp.’s Windows Phone 7 operating system to replace the Symbian line. He expects the new phones to debut by the end of this year.

“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,” Fitch analyst Stuart Reid said. “The pace of deterioration has picked up since Nokia decided to switch to an alternative operating system.”

The extra yield investors demand to buy Nokia’s 500 million euros of 6.75 percent bonds due 2019 instead of benchmark German government debt jumped 51 basis points today to 251, according to Bloomberg Bond Trader. A widening credit spread indicates a decline in creditworthiness.

Windows Phones

Nokia would need to show steadier margins and “a degree of sustainable profitability” as well as a good reception for the Windows phones in order for Fitch to restore the outlook to stable, the agency said.

Nokia’s smartphone market share has fallen by half, to 25.5 percent in the first quarter, from 50.8 percent in the second quarter of 2007, according to Gartner Inc. Google’s Android system, supported by dozens of vendors, has grown to become the largest smartphone operating system with 36 percent of units sold in the first quarter.

Nokia dropped 1.9 percent to 4.46 euros as of 4:46 p.m. in Helsinki. The stock has lost about three-quarters of its value since Apple’s 2007 introduction of the iPhone, which raised consumer expectations for handsets that can handle corporate e- mail and play movies.

‘Increased Confidence’

Nokia was overtaken last quarter by Cupertino, California- based Apple as the largest maker of mobile phones by revenue. On Feb. 11, the day Nokia struck its agreement with Microsoft, the Finnish company’s shares fell 14 percent.

Elop, who joined from Microsoft in September, told investors on May 31 that he has “increased confidence” that the company can ship its first Windows Phone in the final quarter.

The lead time for establishing the Windows Phone range “places an uncomfortably long phase of pressure on the existing handset business and raises the specter of further cash flow deterioration and increased leverage metrics beyond the end of 2011,” Fitch said.

--Editors: Simon Thiel, Kenneth Wong.

To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong in Berlin at kwong11@bloomberg.net


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