Standard & Poor’s has further downgraded Nokia’s rating, after news of the buyout of Siemens stake in the joint network equipment venture emerged. Nokia has purchased the stake for $2.2 billion. The rating is now at B+, a step below the BB- rating Nokia had earlier. S&P states that this rating change comes because of the added pressure this stake buyout has put on the Finnish company’s finances.
“We continue to think free operating cash flow (FOCF) will be negative in the second half of 2013 and for the full year, including the cash restructuring outlays after Nokia reported cash burn of at least €300 million during the second quarter. We also continue to be concerned about Nokia’s ability to sustainably generate positive FOCF–especially in its Devices & Services (D&S) division, given the low visibility on revenues and margins and its small market share in smartphones. We also think NSN’s FOCF could fluctuate, notably because of marked swings in working capital. So, we think Nokia may struggle to return to positive free cash generation in 2014,” said S&P in the press note regarding this announcement.
Nokia, meanwhile, responded to the rating downgrade, with a blog post on its website. “”With a strong positive gross and net cash position, Nokia was able to take advantage of an opportunity to fully own Nokia Siemens Networks and, we believe, create meaningful value for Nokia shareholders. We will continue to prudently manage our cash resources post-transaction”, said Timo Ihamuotila, Nokia’s Executive Vice President and CFO.
This isn’t the first ratings agency to downgrade Nokia, and monitor its progress closely. Moody’s current has Nokia on B2, with active consideration of a downgrade to Ba3.
To give you a better idea of how these ratings work, they are essentially like an individual’s credit rating. The worse the rating, and the finances, the more difficult it is to secure loans or borrow money. And whatever money does come in, comes in at a huge cost.
However, this buyout of Siemens stake gives Nokia 100% ownership of NSN, giving it complete control over the 4G network technology.