Bloomberg News

Nokia’s Debt Rating Cut to Two Steps Above Junk by Moody’s

July 27, 2011

(Updates with CDS spreads in eighth paragraph.)

July 27 (Bloomberg) -- Nokia Oyj, the world’s biggest maker of mobile phones, had its debt rating cut to two steps above junk by Moody’s Investors Service, which cited “a severe weakening” of the Finnish company’s market position.

The senior debt rating was reduced by two steps to Baa2, the second-lowest among 10 investment-grade rankings, with a negative outlook, Moody’s said in a statement today announcing its second downgrade of Nokia in four months. The change affects about 3.5 billion euros ($5.1 billion) in senior debt.

“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,” Moody’s analyst Wolfgang Draack said in the statement, which also cited “increasing price pressure and gaps in the company’s mobile-phone portfolio that are now being filled.”

The company’s handset shipments declined 20 percent to 88.5 million in the second quarter, the lowest quarterly volume in five years, as it fixed inventory problems and struggled to roll out new models. Espoo, Finland-based Nokia may also have to contribute additional capital or funding to its phone-equipment venture with Siemens AG, Moody’s said.

“Because of intense price pressure, Nokia Siemens Networks is generating neither material profits nor cash flows,” Draack wrote, adding that Nokia Siemens may have trouble refinancing its 2 billion-euro revolving credit agreement before maturity in June 2012 if it doesn’t have help.

Second-Quarter Loss

Nokia this month reported a wider-than-expected second- quarter net loss of 368 million euros as handset sales in Europe and China slid. The company is facing stiff competition as smartphones using Google Inc.’s Android software eat into its mid-range feature-phone sales as well as the high end. Nokia Chief Executive Officer Stephen Elop is transferring Symbian software development to Accenture Plc as the Symbian phone lines are gradually displaced by new models based on Microsoft Corp.’s Windows Phone.

“Moody’s rating action will not have a material impact on our current financing costs,” Nokia spokesman Doug Dawson said in a statement. He reiterated Elop’s target of increasing the company’s net cash and other liquid assets by the end of the year from 3.9 billion euros at the end of the second quarter.

Bond Yield

The extra yield investors demand to hold the company’s 6.75 percent bonds due 2019 rather than government debt spiked after the company said on May 31 its adjusted second-quarter handset operating margin could be “around breakeven.” That margin was 10.9 percent for the full year 2010. The cost of insuring Nokia debt soared to a peak of 291 basis points July 20, the day before Nokia reported earnings, from 120 basis points May 30, according to CMA prices for credit-default swaps.

The first Windows Phones are expected to ship in the fourth quarter, followed by a broader range next year. Elop announced a program of job cuts in April.

Standard & Poor’s cut its long-term rating on Nokia to BBB+ on June 9. Moody’s cut its rating to A3 from A2 on April 7.

--With assistance from Abigail Moses and John Glover in London. Editors: Kenneth Wong, Robert Valpuesta.

To contact the reporter on this story: Diana ben-Aaron in Helsinki at

To contact the editor responsible for this story: Kenneth Wong in Berlin at

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