S&P Downgrades Nokia to Dead Meat

S&P noted:

it lowered its long-term corporate credit rating on Finnish mobile telecommunications equipment manufacturer Nokia Corp. to ‘B+’ from ‘BB-‘ and affirmed its ‘B’ short-term corporate credit rating. The outlook is stable.

At the same time, we lowered our issue rating on Nokia’s senior unsecured debt to ‘B+’ from ‘BB-‘. The recovery rating on this debt remains at ‘3’, reflecting our expectation of meaningful (50%-70%) recovery in the event of a payment default.

The rating action reflects Nokia’s acquisition of the 50% stake in Nokia Siemens Networks (NSN) from Siemens for €1.7 billion, making Nokia the 100% owner. Nokia’s strong balance sheet, which we view as an offsetting factor to Nokia’s cash burn and supportive to the rating, will weaken following the acquisition. We also factor in the company’s estimate cash burn of €300 million-€800 million during the second quarter of 2013.

The ratings reflect our revised assessment of Nokia’s financial risk profile assessment to “aggressive” from “significant.” We continue to assess its business risk profile as “weak.”

We understand 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. We have lowered our estimate of Nokia’s net cash to €1.3 billion or above at end-2013 from €3 billion or above previously.

We continue 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. We 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. We also think NSN’s FOCF could fluctuate, notably because of marked swings in working capital. So, we think Nokia may struggle to return to positive free cash generation in 2014.