Nokia rated as junk

Once an iconic cellphone manufacturer, Nokia has had its long-term debt rating cut to junk by Fitch Ratings for the first time.

The global rating agency no longer sees the Finnish company as investment-grade.

The blow comes just weeks after Nokia was downgraded by both Moody's and Standard and Poor's to one notch above junk. Fitch has also issued a negative outlook on the cellphone company's long-term debt, an indication that Nokia's rating could worsen in future.

Fitch downgraded Nokia on the back of a deterioration in Nokia's core devices and services division in the first quarter of the year. Nokia has slowly been losing market share and, while still the top-selling brand, now commands less than a quarter of all sales, according to Gartner.

The ratings agency said while there were aspects that could be positive for Nokia's credit profile, there are “numerous negative potential factors, which could delay or fully impede a recovery”.

The launch of the new Lumia phone with AT&T and the potential launch of new products later in the year are cited as positives.

Fitch is concerned over “further dramatic declines in Nokia's low-end smartphone and feature phone business, further losses at Nokia Siemens Networks, or only partial success of the Lumia product range that does not compensate fully for the declines in the rest of the business”.

“Nokia's profile is no longer commensurate with an investment-grade rating.”

Fitch says Nokia must show “substantial” improvements over the third and fourth quarters of 2012 and 2013 to avoid its rating being cut further. Nokia needs to stabilise revenue and generate low single-digit operating profit margins to maintain its junk status.

“Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months.”

Moody's said its downgrade was triggered by Nokia's announcement this month that it recorded a “severe decline” in first quarter mobile phone sales, which fell 16% year-on-year.

The agency believes the structural challenges facing Nokia's mobile phones segment may not be easy to address, such as the market share gains by low-end manufacturers or new phone promotions by Chinese carriers. It says this is worrying as the unit is Nokia's core income generator and biggest operating profit contributor.

Moody's said it may downgrade below investment-grade if Lumia fails to gain momentum, its operating margin declines and it continues to use high levels of cash. “Given that the rating outlook is negative, there is currently limited potential for an upgrade of Nokia's ratings.”

Nokia hit back at Fitch's rating, saying its financial position is strong and it has net cash of EUR4.9 billion. CFO and executive VP Timo Ihamuotila says the company is “quickly taking action to position Nokia for future growth and success”.

Ihamuotila says “Nokia will continue to increase its focus on lowering the company's cost structure, improving cash flow and maintaining a strong financial position”.

However, Fitch cautions that Nokia's cash position could be eroded over the next 18 months, because of large restructuring costs and a potential negative operating cash flow.

On 19 April, the company reported its first quarter results and said net sales fell to EUR7.4 billion, from EUR10.4 billion, year-on-year. The company reported an operating loss of EUR1.3 billion, compared with a gain in the first quarter of 2011 of EUR439 million.

At the time, CEO Stephen Elop said Nokia was “navigating through a significant company transition in an industry environment that continues to evolve and shift quickly”. He said the company had made progress with its new strategy, but faced “greater than expected competitive challenges”.

World Wide Worx MD Arthur Goldstuck says Nokia has failed to capture consumers' minds and the company is set to be overtaken by Samsung as the global leader. “It's not happening for Nokia.”

According to the latest available figures from Gartner, for the third quarter of last year, Nokia's market share dropped to 23.9% from 28.2%, year-on-year.

Goldstuck points out that there is no investor confidence in Nokia's share. “They are in danger of becoming a penny stock.”