The outlook revision reflects our revised assumption that profitability
improvement in 2013-2014 could be difficult to achieve, and uncertainty about
assets of the 50%-owned equity-accounted joint venture ST-Ericsson. The
corporate credit rating reflects Standard & Poor's assessment of the company's
business risk profile as "satisfactory", including our assessment of its
management and governance as "satisfactory", and its financial risk profile as
In our base-case assessment, we now expect Ericsson's revenues to grow by
low-single digits in 2013 and 2014 after a small decline in 2012 (revenues
fell by 1.5% in the 12 months ended Sept. 30, 2012). We have slightly revised
our assumptions because we think the overall mobile equipment market could
remain pressured by economic or industry-specific challenges such as a weak
European economy and the monetization of mobile data traffic; according to
industry research firm Dell'Oro, the global mobile telecom equipment market
fell by 11% in the third quarter of 2012 compared with the year before. Mobile
operators' cautiousness could continue to affect unfavorably Ericsson's
revenue mix, with more low-margin coverage projects and fewer high-margin
We now think that Ericsson's EBITDA margin could remain stable at about 10% in
2013-2014, which is lower than our previous assumption of a gradual
improvement. This is despite our expectation that Ericsson's margins will
benefit from the gradual termination of a number of low-margin European
modernization projects through 2013, because we think profitability
improvements could be offset given the continued price erosion and pressure on
market shares. Ericsson remains the global leader in mobile network
technologies but is continuously challenged by aggressive competitors:
According to Dell'Oro, Ericsson's share of the mobile telecom equipment market
fell to 34% in the third quarter of 2012 from 35.5% in the previous quarter.
Ericsson recently announced it will take a charge of Swedish krona (SEK)8
billion in the fourth quarter of 2012 relating to ST-Ericsson, including SEK3
billion for future cash outflows, primarily in 2013. Unlike its partner
STMicroelectronics N.V. (BBB/Negative/A-2), which announced that it would exit
ST-Ericsson in the third quarter of 2013, Ericsson is considering several
options with ST-Ericsson assets. We understand that Ericsson will not acquire
all the STMicroelectronics shares, but it is unclear what options will be
chosen and how Ericsson's choice will affect the group's margins and balance
sheet; ST-Ericsson has reported a significant loss over recent years and we
expect it to report negative cash flow in 2012 and 2013.
The short-term rating is 'A-2'. We assess the company's liquidity as "strong,"
as defined in our criteria, because we expect sources of liquidity to amount
to at least 1.5x uses over the next two years.
We estimate Ericsson's liquidity sources at about SEK79 billion in 2012 and
SEK65 billion in 2013. These include primarily:
-- About SEK30 billion of surplus cash. We deduct SEK45 billion from the
company's reported consolidated cash and short-term investments of SEK75
billion, which we believe is needed to support the operations and seasonal
working capital or held in countries with exchange control restrictions
(SEK13.9 billion as of Dec. 31, 2011).
-- Funds from operations (FFO) of SEK18 billion per year.
-- An undrawn revolving credit facility of $2.0 billion maturing in July
2014, which has no financial covenants.
-- EUR1.05 billion in proceeds from the divestment of a 50% stake in Sony
Ericsson Mobile Communications AB.
-- A $1 billion 10-year bond issued in May 2012.
We estimate Ericsson's liquidity uses at about SEK42 billion in 2012 and SEK30
billion in 2013, primarily including:
-- Annual capital expenditures of SEK6 billion.
-- The acquisition of Telcordia for $1.15 billion in the first quarter of
-- Annual dividends, estimated at about SEK8 billion-SEK9 billion.
-- Debt amortization of about SEK7 billion in 2012 (including the buyback
of EUR442 million in bonds in June 2012) and SEK4 billion in 2013.
-- Future additional restructuring outlays at Ericsson.
-- Potential financial support for ST-Ericsson, including a SEK3 billion
cash outflow in 2013 and assuming Ericsson maintained its current ownership.
The company has good relationships with its banks and a good standing in the
credit markets, in our view.
The negative outlook reflects the possibility of a one-notch downgrade in the
next two years if profitability remained at current levels in 2013 or if
Ericsson's currently strong balance sheet and significant net financial cash
position weakened as a result of a transaction with ST-Ericsson assets,
aggressive acquisition activities, or large shareholder distributions that
materially exceeded free operating cash flow.
We could revise the outlook to stable if the group's margin gradually improved
and if any cash burn at ST-Ericsson remained comfortably within Ericsson's
liquidity means. In addition, adjusted credit ratios would have to return to
what we view as adequate for the current rating, notably debt to EBITDA of 2x
and FFO to debt of 45%; we currently expect the ratios to remain slightly
weaker than those levels in 2013.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
Sept. 18, 2012
-- Key Credit Factors: Methodology And Assumptions On Risks In The Global
High Technology Industry, Oct. 15, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings Affirmed; CreditWatch/Outlook Action
Ericsson (Telefonaktiebolaget L.M.)
Corporate Credit Rating BBB+/Negative/A-2 BBB+/Stable/A-2
Nordic Rating Scale --/--/K-1
Senior Unsecured BBB+