Fitch downgrades Nokia

Fitch Ratings has downgraded Nokia's Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BB+' from 'BBB-'. The outlook on the long-term IDR is negative.

The downgrade reflects Fitch's view that the deterioration in the company's core Devices and Services division in Q1, together with the company guidance of -3% non-IFRS operating margins or below for the division for Q2 and the general lack of visibility beyond this point, means Nokia's profile is no longer commensurate with an investment grade rating.

To avoid further negative rating action, Nokia needs to demonstrate substantial improvements over Q312, Q412 and 2013. Fitch believes that Nokia needs to stabilize revenues and be capable of generating low-single digit non-IFRS operating profit margins and positive pre-dividend free cash flow, if Fitch is to affirm the rating at the 'BB+' rating level. Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months.

The launch of the new Lumia phone with AT&T, and the potential launch of new Nokia products later in the year, could be positive for Nokia's credit profile. However, there are also numerous negative potential factors which could delay or fully impede a recovery.

These could come from further dramatic declines in Nokia's low-end smartphone and feature phone business, further losses at NSN, or only partial success of the Lumia product range that does not compensate fully for the declines in the rest of the business.

Nokia currently has gross cash of EUR9.8bn and a net cash position of EUR4.9bn as at Q112. Although this net cash position is currently strong, this could be depleted over the next 18 months by substantial restructuring charges and the potentially negative operating cash flow that could persist unless the company's operating performance improves.

The agency will closely monitor the company's Q312 and Q412 results for evidence of a stabilization of operating trends. If Fitch believes that Nokia is not capable of stabilizing revenues and generating positive operating margins, further negative rating actions will be taken.