Nokia's Investment-Grade Rating Under Threat as Competition Heats Up

Strategic Insights -

Nokia Oyj is facing pressure from its investment-grade rating due to increased competition from Apple Inc's iPhone and Google Inc's Android, which has eaten into the market-leading position held by the world's biggest seller of handsets. The company's failure to meet analyst forecasts in its second-quarter results and its decision to dump its 2011 targets have contributed to the decline in investor confidence. Credit investors are demanding higher yields to hold Nokia's 6.75% bonds due 2019, with the spread over government debt more than doubling to 307 basis points since May 30.

Key Takeaways:

  • Nokia's investment-grade rating is under threat due to increased competition from Apple and Google.
  • The company has seen its value plunge by more than 77% since Apple introduced the iPhone in June 2007.
  • Nokia's sales of $61 billion in 2010 are equivalent to about a quarter of Finland's annual economic output.
  • The company's cash burn and sliding margins have been cited by Fitch Ratings and Standard & Poor's as reasons for potential further downgrades.
  • Nokia is racing to come up with products to meet consumer demand for smartphones, particularly in Europe and China.
  • The company's plan to reduce expenditures by €1.4 billion ($1.5 billion) may not be enough to stem the erosion in market share.
  • It's "very likely" Nokia will have to reduce or suspend its dividend as it carries out the transition to Windows software.

Statistics:

  • Nokia's value has plunged by more than 77% since Apple introduced the iPhone in June 2007.
  • The spread over government debt on Nokia's 6.75% bonds due 2019 has more than doubled to 307 basis points since May 30.
  • Credit-default swaps on Nokia debt soared to 246 basis points from 120 in the period.
  • Nokia's 2019 bonds yield about 5.9%, compared with the 3.77% average for European industrial companies rated BBB.
  • The average spread on bonds rated A is 91 basis points, according to Bank of America's EMU Corporates, Industrials, A Rated index.
  • Credit-default swaps on the Markit iTraxx Crossover Index of 40 companies with mostly high-yield credit ratings are at 397, according to JPMorgan Chase & Co.

Sources:

  • "Nokia's rating review worries investors" by Reuters (no date provided)
  • "Nokia's rating put on notice" by The Financial Times (no date provided)
  • "Nokia said to face junk-bond risk after rating downgrade" by Bloomberg (no date provided)
  • "Nokia downgraded by Fitch, Standard & Poor's" by The Wall Street Journal (no date provided)