Nokia debt rating cut to junk

The Finland based cell phone manufacturer has seen their debt rating downgraded to BB+ by Fitch ratings which cited the company as lacking an sort of visibility. BB+ is the highest junk rating. Fitch ratings went on with the negative outlook saying that it is very possible that the rating will once again be downgraded if there are not significant visible improvements.

The company at one time held half of the market share of smartphones. In recent years the company has been struggling to find it’s niche in the handset, and more specifically, the smartphone market. In 2007 the handset manufacturer held and impressive 50% of the smartphone market. However, after the entrance of Android and Apple to the smartphone market, things changed dramatically. Nokia now owns around 10 percent of the market, a substantial loss of it’s once large market share.

For the last 14 months, Nokia has been burning through it’s cash reserves in order to create smartphones that use the Windows operating system. Nokia reported a 1st quarter loss and said that this quarter is likely to be the same.

“In order to avoid further negative rating action, Nokia needs to demonstrate substantial improvements” through 2013, Fitch analyst Owen Fenton wrote in a report. “Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months.”

The cost of insurance against Nokia debt default has risen dramatically, from 11.5 basis points to 546 basis points when referring to credit default swaps. Credit default swaps pay the buyer face value in exchange for the securities if the borrower cannot pay.

“Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position”, Chief Financial Officer Timo Ihamuotila said. Nokia had net 4.9 billion euros at the end of the 1st quarter.

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