Fitch Maintains Nokia's 'BB-' Ratings on Rating Watch Positive

Tue Mar 4, 2014 11:26am EST

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(The following statement was released by the rating agency) LONDON, March 04 (Fitch) Fitch Ratings has maintained Nokia Corporation's (Nokia) 'BB-' Issuer Default Rating (IDR) and senior unsecured ratings on Rating Watch Positive (RWP), pending the closing of the disposal of Nokia's Devices & Services (D&S) activities to Microsoft Corporation (AA+/Stable). Fitch placed Nokia on RWP at the time of the disposal announcement in September 2013. Nokia continues to guide to a transaction close in 1Q14 and that it intends to announce the results of its strategic evaluation shortly afterwards. Resolution of the RWP will include a formal review of the underlying continuing operations as well as an understanding of management's intentions with respect to the disposal proceeds and objectives for the long-term capitalisation of the business. KEY RATING DRIVERS Removing Handsets Weakness The sale of the D&S business will bring to a close a period of extreme stress in the credit profile of the handset industry's former leading manufacturer, which at one time accounted for close to 40% handset unit volumes on a consistent basis. The pace of industry change, the accelerated advent of the smartphone and dominance of Apple's iOS and Google's Android as the industry's leading operating systems have seen Nokia's handsets business increasingly marginalised. The business has recorded significant losses and driven material weakness in the company's cash flows. Non-IFRS losses from discounted operations were EUR667m in 2013 (EUR1.1bn in 2012) while net cash flow was negative EUR1.2bn (2012: negative EUR2.4bn). NSN, Advanced Technologies Underpin Profile Following the disposal, Nokia Solutions & Networks (NSN) and the newly created Advanced Technologies (the division housing Nokia's technology licensing activities) will form the most significant underlying business drivers of the group. NSN, which accounted for 89% of 2013 ongoing revenues, has reported increasingly solid results, although top-line performance continues to reflect decisions to exit low margin or unprofitable markets and customer relationships. Non-IFRS operating income of EUR1.1bn and a margin of 9.7% at NSN in 2013 underlines the increasing resilience of this business. Advanced Technologies is expected to increase its annualised net revenue run-rate to EUR600m following the D&S disposal, while the division reported a non-IFRS operating profit of EUR329m and margin of 62.2% in FY13. Nokia's location/mapping division (HERE) provides a smaller (FY13 sales of EUR914m/non-IFRS margin 5.2%) but nonetheless important revenue stream. Improved Earnings Visibility Revenue pressures at NSN (both market driven and a function of ongoing strategic contract exits) continue to be expected in 2014. Fitch assumes high single/low double digit declines in our rating case. Revenue and margin visibility at NSN and Advanced Technologies is nonetheless expected to be far better than under a reporting perimeter that previously included the volatility and weakness in the D&S division. The sustainability of revenues and margins at NSN will be an important driver in determining any potential ratings upside for Nokia, while a separately reported division housing the company's licensing activity increases visibility of this high margin revenue stream. Ratings Upside Fitch continues to guide that closing of the transaction is likely to result at a minimum in the affirmation of the current rating and assignment of a Stable Outlook, but that potential exists for a one-notch upgrade. The D&S disposal will remove the weakest and most challenging part of the business, a business that was burning cash at a run-rate of around EUR300m per quarter in 2013. Continuing operations generate healthy underlying cash flow and Nokia is expected to continue to manage the balance sheet conservatively, ie on a net cash basis. Fitch's confidence in the sustainability of cash flows in the underlying business, although this was materially down on the previous year, is the key driver to ratings upside from the current level. We similarly view a commitment to conservative financial policies and a net cash position as important for the rating. RATING SENSITIVITIES Positive: Future developments that could lead to positive rating action include: Closure of the D&S disposal along with signs the margin and cash flow profile currently presented by Nokia on a pro-forma basis are sustainable. Any positive rating action would be predicated on clarity over management's expectations for the company's long-term capital structure. Fitch would expect this to continue to include a net cash position. Negative: Future developments that could lead to negative rating action include: Failure of the proposed disposal to complete on a timely basis would be likely to lead at a minimum to the assignment of a Negative Outlook on the current ratings, subject to ongoing performance at both NSN and the D&S division. Contact: Principal Analyst Jonathan Levy Analyst +44 20 3530 Supervisory Analyst Stuart Reid Senior Director +44 20 3530 1085 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew Managing Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 5 August 2013; 'Rating Technology Companies', dated 9 August 2012, are available on www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Rating Technology Companies here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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