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Nokia Debt Downgraded on Smartphone Weakness, NSN Losses

25 декабря 2009

Following a review of Nokia's recent business outlook report, debt ratings agency, Fitch has issued a downgrade of Nokia's debt ratings. Fitch has downgraded Nokia's Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'A-' from 'A' respectively. The Short-term IDR has been downgraded to 'F2' from 'F1'. The Outlook on the Long-term IDR is Stable.

The downgrade follows the update to the company's strategy and revised financial guidance provided at Nokia's Capital Markets Day (CMD) on 2 December, which continue to signal margins in the core Devices & Services division are unlikely to quickly regain the levels formerly reported by the company's handsets business. Coupled with what is potentially now a rebasing of the devices business, to lower albeit good levels of profitability, the company's network infrastructure JV with Siemens, Nokia Siemens Networks (NSN), continues to face significant challenges. The JV lost market share in 2009 and is now expected to generate considerably weaker earnings than projected at the time of the merger in 2007. With a non-IFRS operating profit target of between breakeven and 2% in 2010, and with earnings in this business currently still negative, NSN is taking longer to integrate and generate the scale synergies that were expected at the time it was formed. (Margin guidance at the 2007 CMD, was for the operating margin to grow to 10% by the end of 2009).

Fitch expects Nokia to report FY09 revenues of around EUR40bn - EUR40.5bn, which would mark a year-on-year decline of approximately 20%, suggesting greater volatility in the company's top-line than had previously been present. The consolidated (non-IFRS) operating margin for 9M09 was 7.0%, a substantial decline from 15.2% for the same period of 2008.

The continued weakness in NSN, reflecting the challenges of integrating the business within a highly competitive infrastructure market, will continue to pressure consolidated margins for the medium term. At the same time, Fitch is concerned that the growth market of smartphones is highly competitive. A number of niche players, including Apple and Research in Motion, have already established strong product positions in smartphones and all the mass market vendors are also seeking to establish market positions.

Fitch considers user interface and software platform upgrades planned for 2010 add a level of uncertainty and the potential to delay progress in Nokia's smartphone strategy. The agency considers the competitive risks facing the company as greater than in the past and the potential to expand margins more challenging. Nokia's cash flow profile has weakened through the industry downturn, while the longer cash conversion cycle and the increased scale of the NSN infrastructure business has compounded the effect on its cash flow profile. A balance sheet which remains strong, has, however, been eroded by reduced underlying cash flow generation along with the US$8.1bn acquisition of NAVTEQ in 2008.

Compared with it's 'A' range technology sector peers, Fitch now considers that Nokia now sits more appropriately at the lower end of this rating range, given what the agency views as heightened top-line volatility, increased business and competitive risk, and a margin and cash flow profile that have potentially been rebased to a lower level.

The downgrade of Nokia's Short-term rating to 'F2' reflects the rating mapping between long and short-term ratings typically associated with a Long-term IDR of 'A-'. It does not signal a deterioration in Nokia's near term liquidity, with the company's EUR7.4bn cash at 3Q09 expected to increase by year-end given the seasonally strong quarter from a cash flow perspective. Coupled with sizeable standby credit facilities, the company's short term debt liabilities of EUR852m, at end-September 2009, are adequately covered. Nokia has undertaken significant issuance activity in 2009, terming out the short term debt (commercial paper) raised to part fund NAVTEQ, which in Fitch's view reflects sensible liability management. The agency notes the heightened M&A risk following the NAVTEQ deal, which could impact future cash balances, although it is reassured by management's stated commitment to rebuilding net cash, which Fitch interprets as a target of more than EUR3.0bn.

Despite the changing business risk of the company, the Stable Outlook reflects that Nokia remains well capitalised with a conservative financial policy and good earnings and cash flow potential from its core handsets business. Potential downgrade triggers would include a consolidated (non-IFRS) operating margin falling to around 5%-6% combined with a pre-distribution free cash flow margin falling to low single digit levels. A change in financial policy suggesting a net cash position below EUR1.0bn-EUR1.5.bn would equally pressure Nokia's current ratings.

Источник: Cellular news

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