Nokia Corp. (NYSE: NOK) is going deeper and deeper into junk bond territory. Days after it announced another set of relatively disappointing quarterly results, two agencies piled on by dropping their ratings on the company's debt.
Today Moody's Investors Service dropped Nokia's bond offerings three levels below investment grade at a time when it could use a much more positive move. The downgrade followed a similar move by Fitch Ratings Ltd. last week.
Moody's downgraded the company's long-term senior unsecured debt rating to Ba3 from Ba1, and it confirmed its outlook on Nokia "remains negative." The ratings agency cited concerns about the poor performance of Nokia's devices and services business in the second quarter. The Lumia smartphone, on which Nokia pinned its hopes for a recovery, isn't selling as fast as would be required to pull the company out of a financial hole, Moody's said. Furthermore:
The negative outlook on Nokia's Ba3 ratings reflect the low visibility with regard to (i) the trend for Nokia's market share in smartphones and whether the Windows-based devices can attain a solid market share with positive income contribution to Nokia; (ii) demand and margin potential for the group's feature phones in emerging markets; and (iii) Nokia's future net cash flows, which are adversely affected by pricing pressure, marketing incentives and restructuring expenditures, although this is partially mitigated by royalty collections, platform payments from Microsoft and potential disposal proceeds.
The potential for an upgrade is "limited," Moody's said.
Nokia executives weren't too pleased with the downgrade. They disputed the agency's conclusion that the company's financial position had worsened. "While we are disappointed with Moody's decision, its impact on the company is limited," CFO Timo Ihamuotila said in a press release. "We are quickly taking action to position Nokia for future growth and success. Nokia will continue to focus on lowering the company's cost structure rapidly, improving cash flow and maintaining a strong financial position."
Those actions have included massive layoffs and a strategic alliance with Microsoft Corp., under which Nokia adopted the software giant's Windows operating system and ditched its own Symbian OS for its handsets. Nokia has also taken steps to expand in the North American market, where it has been relegated to bit-player status for the last several years.
None of these actions will help Nokia in the short term. In fact, the company is highly likely to keep facing tough market conditions for a while. Its future profitability could come into question if customers do not show interest in the Lumia and other phones. For now, it's safe to bet on Nokia not getting its investment grade back this year.