Ratings cut piles fresh agony on Nokia

HELSINKI Tue Apr 24, 2012 4:50pm BST

Nokia's President and CEO Stephen Elop gestures as he speaks during a news conference for the launch of the new Nokia Lumia products in Beijing, March 28, 2012. REUTERS/Soo Hoo Zheyang

Nokia's President and CEO Stephen Elop gestures as he speaks during a news conference for the launch of the new Nokia Lumia products in Beijing, March 28, 2012.

Credit: Reuters/Soo Hoo Zheyang

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HELSINKI (Reuters) - Fitch ratings agency piled fresh agony on Nokia on Tuesday, cutting its debt rating to junk status for the first time and warning the struggling handset maker's cash position was under severe strain.

Nokia's rating - already downgraded in recent weeks by Standard & Poor's and Moody's - was cut to BB+ from BBB- by Fitch which said this could be lowered further unless the company's business improved over the second half of 2012 and in 2013.

"Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months," it said in a statement.

Nokia, once the world's dominant mobile phone provider, is struggling to keep up with Apple Inc (AAPL.O) and Google Inc (GOOG.O) in the smartphone business.

Chief Executive Stephen Elop is placing hopes of a turnaround on a new range of smartphones called Lumia, which use Microsoft Corp (MSFT.O) software.

But Lumia sales have so far been slow, and are yet to compensate for diving sales of Nokia's legacy products. Last week Nokia said its phone business would post losses in the first two quarters, announced the departure of its sales chief and promised to slash more costs.

Shares in Nokia, which were hit badly this month on its loss warning, fell more than 2 percent at one point to a new 15-year low of 2.60 euros. They were trading down 0.5 percent at 2.72 euros at 1522 GMT.

"The downgrade action by Fitch represents only one out of three and considering that its other two ratings are still investment grade, the effects should not be overly dramatic for now," said Brendon Moran, co-head of corporate origination at Societe Generale in London.

"The risk, however, is heightened that one of the other agencies takes a similar view to Fitch and Nokia has to start considering its funding strategy in the context of non-investment grade market," Moran said.

Nokia defended its financial position, citing its net cash position of 4.9 billion euros ($6.4 billion) as of end-March.

"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.

Fitch, however, said Nokia's cash could be depleted over the next 18 months by substantial restructuring charges and potentially negative operating cash flow.

BETTING ON LUMIA

Nokia, once the undisputed leader in the cellphone industry, has issued two eurobonds worth in total 1.75 billion euros and two dollar bonds worth $1.5 billion in total.

Nokia's 5.5 pct April 2014 euro note's asset swap spread widened 127.8 basis points to 441 basis point at 1350 GMT, while the spread on the 6.75 pct April 2019 note was 60 basis points wider at 574 basis points, according to Tradeweb.

"The launch of the new Lumia phone with AT&T (T.N), and the potential launch of new Nokia products later in the year, could be positive for Nokia's credit profile," Fitch said.

"However, there are also numerous negative potential factors which could delay or fully impede a recovery."

Moody's cut Nokia's rating to just one notch above junk earlier this month, while Standard & Poor's made a similar downgrade last month.

In 2011, Fitch downgraded 31 corporates to speculative from investment grade compared with just 18 a year earlier, with European banks making up the majority of the downgrades.

Some analysts have said Nokia shares look massively undervalued, considering its cash position and large patent portfolio, but they also caution shares could drop further in the absence of a sales recovery.

Indexes analyst Mike Rattan said it was difficult to put a value on Nokia.

He said Blackberry-maker Research In Motion RIM.TO, which is trading at book value, may be a benchmark for some investors even though he saw Nokia's patent portfolio as more valuable than ROM's.

"If Nokia's stock was valued at tangible book value, then the bottom would be around 1.8 euros, excluding the dividend," Rattan said. He also said investors were wary of considering any possible takeover premium.

"Because the company has so many problems, it is not that attractive as a take-over target," he said.

($1 = 0.7619 euros)

(Additional reporting by Josie Cox and Terhi Kinnunen; Editing by David Cowell)

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