Nokia Swaps Trade Like Junk as Cash Dwindles
Nokia Oyj (NOK1V), once the world’s biggest
smartphone maker, risks a downgrade to junk-bond status after
cutting its profit forecast and reporting a decline in its cash.
Nokia’s credit-default swaps soared for a seventh day
yesterday, rising 62 basis points to a record 435 basis points,
according to data provider CMA. Espoo, Finland-based Nokia’s
swaps imply a Ba2 bond rating, according to Moody’s Analytics.
That’s the second-highest junk grade and three levels below the
company’s Baa2 at Moody’s Investors Service.
The firm is burning cash 14 months after linking up with
Microsoft Corp. to make phones based on the U.S. company’s
Windows Phone software. Nokia abandoned its own system, Symbian,
which couldn’t keep up with Google Inc. (GOOG)’s Android platform and
Apple Inc. (AAPL)’s iPhones. The Finnish company reported a first-
quarter operating loss for its mobile phone unit and forecast
earnings wouldn’t recover this quarter.
“We’re going to see the crisis perhaps reach a terminal
phase if the cash begins to dwindle to levels where we’re
looking at a couple of quarters left,” Horace Dediu, a
Helsinki-based analyst at industry-research website Asymco.com,
said in a telephone interview. “That will cause a liquidity
crisis. It’s already causing a confidence crisis with respect to
their debt. The cost of financial distress would bring the
Nokia declined 4.6 percent to 3.12 euros as of 10:22 in
The company’s $1 billion of 5.375 notes due in May 2019
dropped 2.9 cents on the dollar to 95.3 cents for a yield of
6.21 percent, according to Trace, the bond-price reporting
service of the Financial Industry Regulatory Authority. That’s
the lowest price ever for the debt, which was issued in April
2009. Nokia has $4.75 billion of bonds and term loans
outstanding, according to data compiled by Bloomberg.
Default swaps insuring the phone maker’s obligations soared
to a record 435,000 euros ($571,000) to protect 10 million euros
of debt, according to CMA, which is owned by CME Group Inc. and
compiles prices quoted by dealers in the privately negotiated
market. The swaps traded at 115,000 euros a year ago.
Nokia’s net cash and other liquid assets shrank to 4.9
billion euros at the end of the first quarter, from 5.6 billion
euros at the close of 2011 and 6.4 billion euros at the end of
March 2011, the company said yesterday in a statement. The firm
that took in almost half the global revenue from smartphones in
2007 now claims only 10 percent of the $219 billion per year
market, Bloomberg data show. Fitch said today that revenue and
profit are “likely to be even lower” than current forecasts.
‘Needs a Winner’
“With its market share plunging, Nokia definitely needs a
winner,” Dave Novosel, an analyst at Chicago-based bond
researcher Gimme Credit LLC, wrote in a March 28 research note
that recommended selling the company’s bonds.
While Nokia’s net cash and other liquid asset holdings
account for about 1.4 times the value of its bonds and term
loans, the company’s ratio of total debt to earnings before
taxes, depreciation and amortization, at 3.4, ranks higher than
80 percent of its peers with market values bigger than $1
billion, Bloomberg data show.
Nokia’s current “burn rate” would also exhaust its cash
holdings by the end of 2013, Asymco.com’s Dediu said. The
company said yesterday the reduction in cash during the quarter
was caused by operating losses and “non-recurring” changes in
net working capital. Its devices and services unit also probably
had a first-quarter operating loss of about 3 percent of sales.
Second-quarter figures will be “similar to or below” those for
the first quarter, it said today.
Free Cash Flow
The phone maker’s free cash flow, which produces money
available to pay down debt, reward shareholders with buybacks
and dividends, or reinvest in the business, plummeted 87 percent
to 541 million euros last year, Bloomberg data show.
Chief Executive Officer Stephen Elop said yesterday during
a conference call to discuss the latest earnings that he’s
reviewing options including asset sales, vowing to take
“significant structural actions if and when necessary.”
“We have to make decisions about, are we concentrating on
certain markets, are we emphasizing certain product
opportunities over others, do we sell off certain non-core
assets along the way,” Elop, whose company yesterday lost about
$3 billion of market value to $15.9 billion, said. “What I’m
really heavily focused on is making sure that we have the right
levels of investment to break through in the areas where we need
to break through.”
Elop shifted Nokia to Microsoft (MSFT)’s Windows Phone platform
more than a year ago after determining his company’s Symbian and
MeeGo systems couldn’t keep up with competition from Apple, now
the biggest smartphone maker by value, and Google.
Nokia already trades at BBB-, the bottom rung of investment
grade at Standard Poor’s. SP cut Nokia’s long-term debt
rating on March 2 from BBB and maintained a “negative”
outlook, reflecting concerns that sinking operating margins and
eroding sales from smartphones based on the Symbian system. SP
analysts led by Thierry Guermann in Stockholm said the debt
could be downgraded in the next two years if margins at its
devices and services division remained in the “low-to-mid
single digits” or if net cash dropped below 2 billion euros.
Nokia had an A- rating at SP and an equivalent A3 at Moody’s
until June of last year.
Nokia’s handset margins, adjusted for some items, dropped
from more than 20 percent in 2007, when Apple introduced the
iPhone, to 4.9 percent in the final quarter of 2011. Net cash,
now about 5 billion euros, will fall to 4.6 billion euros this
year, according to analyst estimates compiled by Bloomberg.
“You’re going to see revenue decline, and you’re going to
see margin decline, and you’re going to see cash flow decline,”
Ping Zhao, an analyst at CreditSights Inc. in New York, said in
a telephone interview. “It’s very likely in the next 12 months
it will get to junk.”
To contact the reporters on this story:
Cornelius Rahn in Frankfurt at
Charles Mead in New York at
To contact the editors responsible for this story:
Kenneth Wong at
Alan Goldstein at