Rating agency Fitch lowered Nokia's debt rating by two steps to 'BB-' from 'BB+' and raised worries over the company's current handset portfolio. The downgrade comes on the heels of weak second-quarter results from the Finnish handset maker.
Nokia Lumia 900
Nokia, which already has a junk debt rating from the three largest rating agencies, last week reported a net loss for its second-quarter of €1.41 billion--significantly worse than the €368 million loss reported a year ago--and larger analysts' expectations for a €654 million loss, according to Dow Jones Newswires.
The company shipped four million Lumia Windows Phone smartphones in the quarter, double the number in the first quarter of the year, and boosted cash reserves by €306 million year-on-year, primarily due to receipts from patent licences and support payments from software partner Microsoft.
However, Fitch worries that Nokia's mounting losses cannot be stemmed by its existing handset portfolio, and the release of a Windows Phone 8 suite of products later this year now appears crucial to its survival, reports Reuters.
The ratings agency claims that adjusted gross margin profile of around 16 per cent in Nokia's smartphone division is not enough to support a profitable smartphone business, and Fitch remains unconvinced of Nokia's ability to improve pricing in this highly competitive segment.
Unless Nokia is able to reverse the situation, Fitch believes there is a significant risk that the company's performance will continue to deteriorate. Despite efforts by the handset vendor to reduce Opex, the rating firm remains unconvinced that Nokia will be able to stabilise revenues and reach an operating profit breakeven point.
Nokia has responded to Fitch's viewpoint, claiming that the company's financial position is strong and liquidity profile "robust," according to Bloomberg, adding that Fitch's rating is "unsolicited."
In addition to its net cash of €4.2 billion at the end of June, Nokia has access to a €1.5 billion revolving credit facility without financial covenants until 2016, the company told Bloomberg.
Nokia CEO Stephen Elop warned that the third quarter will remain difficult. "It is a critical priority to return our Devices & Services business to positive operating cash flow as quickly as possible," he said.
He added that the company's board of directors expects to take a "conservative view" when it comes to paying out a dividend in 2013 if the company is still in "transition" early next year.
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