Moody's Investors Service on Friday downgraded the long-term senior unsecured ratings and short-term senior unsecured ratings of Nokia Oyj (NOK: Quote), saying the handset maker's far-reaching restructuring plan "delineates a scale of earnings pressure and cash consumption that is larger than we had previously assumed."
The long-term senior unsecured ratings were cut to 'Ba1' from 'Baa3' and short-term senior unsecured ratings were lowered to Not-Prime from Prime-3. Moody's also assigned a 'Ba1' corporate family rating and a probability of default rating to the company. The outlook on all ratings remains negative.
Nokia was once an undisputed leader in the handset industry, which made Finland a popular name all over the world. However, the firm was not able to effectively cater to the market trends and soon found itself taken over by the likes of Apple Inc. (AAPL: Quote) in the smartphone market.
Companies such as Samsung Electronics (SSNLF.PK,SSNNF.PK) produced cheaper feature phones to satisfy the emerging markets, thus making survival tough for Nokia.
Under Chief Executive Officer Stephen Elop, the firm has been trying to cut costs and come up with more products that satisfy both price conscious and technology savvy customers.
Nokia on Thursday unveiled a new set of restructuring actions, which included elimination of 10,000 jobs globally by the end of 2013 and divesting some non-core assets. It also raised the cost reduction target for its device-making unit.
Moody's said today that despite the downgrade, it views Nokia's actions as positive and necessary to return the group to profitability. The ratings agency believes that the Finnish firm's profitability also depends on the company successfully transitioning its smartphones to the new Windows operating system and stabilizing its feature phone business.
However, Moody's warned that if Nokia's revenues do not stabilize soon, it may need to carry out additional restructuring.
According to Moody's, Nokia's Lumia smartphones need to gain traction in the smartphone market and may get a boost from the introduction of the Windows 8 operating system for mobile devices in the second half of 2012.
Also, the Asha full touch-screen model, announced early this month, should help support demand for feature phones and raise average selling prices. Nokia may sell fewer units of mobile phones due to scaling down of distribution networks and the migration of customers to smartphones with lower prices.
Moody's now expects Nokia's non-International Financial Reporting Standards operating margins in its Devices & Services segment to fall to the negative mid-single digits in percentage terms from -3 percent assumed so far in the next one or two quarters. This is expected to materially improve in the second half, driven by rising sales of new Lumia smartphone range and realized cost savings.
Nokia's high gross and net cash balances should remain strong during its product transition to Windows-based devices, with its net reported cash likely to remain above 3.0 billion euros, Moody's said.
Moody's also believes that Nokia may have to contribute additional capital or funding to Nokia Siemens Networks if the company's restructuring costs start to exceed its cash flow from operations.
After the restructuring was announced, Credit Suisse lowered its rating on Nokia to "Neutral" from "Outperform." However, Citigroup raised the stock to "Neutral" from "Sell."
Nokia shares are currently adding 3.5 percent in Helsinki at 1.89 euros on a volume of 44.52 million shares.
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by RTT Staff Writer
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