On Monday, Moody’s Corporation (NYSE:MCO) cut Nokia Corporation (NYSE:NOK)’s credit rating down two notches from Ba1 to Ba3. It cited expectations for greater losses by the company, and larger cash spending, than initially anticipated.
Nokia Corporation (NYSE:NOK) has been trying to battle its fall, by using Microsoft Corporation (NASDAQ:MSFT) software, but Apple Inc. (NASDAQ:AAPL) and Samsung have been difficult rivals to successfully challenge.
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A cut in the company’s debt rating isn’t anything new, as its been done by all of the three ratings agencies in the last few months, thanks to Nokia’s increasing sales decline, reported The Financial Times’ Daniel Thomas. Just last week after Nokia’s second quarter results, Fitch Ratings again cut Nokia’s ratings.
In the earnings report, Nokia announced a 1.53 billion euros loss, and said that it concluded June with net cash of 4.2 billion euros ($5.2 billion), greater than the 3.7 billion euros market estimates but it came primarily from its prepayment of royalties.
The company also said it would slash additional costs and will protect its finances; it also noted that it can obtain liquidity via a 1.5 billion euros revolving credit facility through March 2016.
Monday’s downgrade shouldn’t have a lot of effect, reported Reuters.
So what exactly did Moody’s report say on Monday? The agency conveyed doubts over the ability for Nokia’s Windows-based smartphones to grab market share, and forecast the next suite of phones with the Windows 8 software will take a few quarters to produce profits, reported Reuters.
It also said of its profit potential, “Given further, rather modest profitability in the mobile phone business and at Nokia Siemens Networks, Moody’s now expects a return to profitability only in the second half 2013.”
Wolfgang Draack, Moody’s Senior Vice President and lead analyst for Nokia, said, according to Reuters, “A return to profitability in the Devices & Services segment on the back of smartphones with the Windows Phone 8 mobile operating systems is by no means assured.”
Draack added that with its latest cut by the agency, it “reflects our view that Nokia’s transition in the smartphone business will cause deeper operating losses and consequently, cash consumption in the coming quarters than we had previously assumed.”
Moody’s also said that Nokia’s net cash balance will continue declining from aggressive pricing, the cash cost of restructuring, and the launch cost for the new devices, reported the Financial Times. It added, “A very strong cash position cannot offset operating challenges and losses in the core business for an extended period of time.”
The agency keep its negative outlook on the company; its shares subsequently dropped in the market, approaching a sixteen-year low.