NOKIA’S RATING was cut to junk for the first time by a debt-rating company as the Finnish mobile-phone maker loses its grip on a market now dominated by Apple and Asian suppliers such as Samsung Electronics.
Fitch Ratings lowered Nokia’s long-term debt ranking to BB+, one step below investment grade, citing a deterioration in the handset business in the first quarter and a “general lack of visibility.”
Fitch said it may further cut the rating if Nokia’s revenue does not stabilise and operating margins do not return to positive. The decision covers about €4.9 billion in debt.
The cost of insuring against default on Nokia’s debt surged to a record. Nokia is burning cash 14 months after linking up with Microsoft to make phones that run on the Windows operating system.
The company this month reported a first-quarter operating loss for its handset unit and said the margins would be similar or worse in the current period.
“In order to avoid further negative rating action, Nokia needs to demonstrate substantial improvements” through 2013, Fitch analyst Owen Fenton wrote in a report. “Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months.”
Credit-default swaps on Nokia bonds rose 55 basis points to 590 basis points, according to data compiled by Bloomberg. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
In 2002, Fitch rated Nokia’s debt A+, the fifth-highest investment grade. Standard and Poor’s and Moody’s currently rank the debt one step above junk. The shares fell 3 per cent to €2.63 at one point in Helsinki yesterday, the lowest since December 1996.
Nokia, which took in almost half the global revenue from smartphones in 2007, now claims only 10 per cent of the annual $219 billion market, Bloomberg data show.
Nokia will continue to increase its focus on lowering the company's cost structure, improving cash flow and maintaining a strong financial position, chief financial officer Timo Ihamuotila said in a statement. The company had about €4.9 billion in net cash at the end of the first quarter. – (Bloomberg)
