Nokia Corporation (NYSE:NOK) plans to issue convertible bonds to raise €750 million, or approximately $989 million, to strengthen its diminishing cash position, as the company tries to increase its competitiveness in the smartphone market and eventually emerge from its existing financial condition.
The Finnish mobile phone manufacturer ended the third quarter with € 3.6 billion net cash. During the third quarter, its nets sales were down by 4 percent and posted an EPS loss of € 0.7. Although Nokia reported negative earnings, analysts believed that the company’s third quarter financial performance is better than expected. Analysts are still uncertain and advised investors to “wait and see”, particularly regarding the competitiveness of its latest smartphones- the Lumia 920, Lumia 820, and Asha.
It is imperative for Nokia Corporation (NYSE:NOK) to make strategic moves to gain investor confidence for its recovery. The credit rating agencies downgraded its status to junk. Some analysts are considering the company’s capability to repay its €1.25bn note, which is about to mature in April 2014, considering the fact that it has only €3.6 billion cash on hand.
A report from Financial Times cited a comment from Timo Ihamuotila, Nokia’s chief financial officer, regarding the company’s convertible bond offering. According to him, “This offering is designed to further strengthen our financial position and liquidity profile, while allowing us to benefit from the current attractive long-term financing opportunities in the convertible bond market.”
The Financial Times noted that convertible bonds in Europe pay out fixed rate. Investors can convert the bonds into shares, based on the agreed price and it enables them to earn from positive stock movements.
Analysts at ING believed that Nokia’s plan to offer bonds is a positive move to reduce concerns regarding Nokia’s capability to pay its short-term debt maturities and to boost its capital. In a research note, the analysts said, “It also shows that the company is taking the question marks around its credit quality seriously, and is willing to take the steps necessary to improve this.”
Nokia Corporation (NYSE:NOK) is taking advantage of the lowest rates in borrowing, to boost its cash position and pay its debts. The company has also debts maturing in 2019 and 2039. Its debt maturing bonds are worth €2.9 billion. In addition, it has €900 million interest-bearing liabilities and €1.4bn responsibilities from its 50 percent joint venture in the Nokia Siemens Networks with Siemens.
The Finnish mobile phone maker’s new bond offerings will start trading by the end of the week. The interest rate paid to the bond until its maturity in 2017 would be 4.25 percent to 5 percent of its face value. The initial premium for converting the bonds into Nokia Corporation (NYSE:NOK) shares would be around 28 percent to 33 percent higher than the price of the stock per share.