Fitch Ratings on Friday downgraded Nokia's debt rating to "BB-" from "BB+" with a negative outlook.
The debt rating downgrade comes as Nokia delivered weak second quarter results and a rough third quarter outlook. The results, which weren't the complete disaster some analysts expected, didn't allay cash concerns for the second half. Bond ratings affect the interest rates that companies pay to float debt.
Nokia ended the quarter with EUR4.2 billion in cash, but that war chest will erode quickly be restructuring charges. Morgan Stanley projects Nokia will end up with EUR2.5 billion in cash by the end of the year.
Fitch believes that the company does not have products in its current portfolio that can stem the recent losses. The release of a Windows 8 suite of products now appears crucial. However, the degree of competition in the industry would suggest that it is going to be difficult to re-establish a significant presence in the smartphone market. Numerous handset makers have issued profit warnings recently. For Nokia, an adjusted gross margin profile of around 16% in its Smart Devices division is unlikely to support a profitable smartphone business and Fitch remains unconvinced of Nokia's ability to improve pricing in this segment. Furthermore, the announcement that the current batch of Lumia devices will not be able to upgrade to Windows 8 is likely to put additional pressures on Nokia in the coming quarters. Given all of these headwinds, there is a significant risk that the company's performance will continue to deteriorate.
Morgan Stanley analyst Francois Meunier said that Nokia inability to project a year-end cash position only makes investors more anxious about the company's prospects. "We believe that investors are very concerned by Nokia’s cash position and guidance on cash would be more than welcome. We forecast EUR2.5 billion net cash by year end," said Meunier.
Nokia's biggest problem is that 20 percent of its device revenue depends on a beat-up Symbian platform. Meanwhile, Lumia sales can't make up the difference. Without significant Windows Phone adoption, Nokia's cash burn will continue. For its part, Nokia can't give an outlook for its year-end cash position because it has little visibility into its business right now.