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Rating downgrade isn't always fatal -- Ford only escaped "junk" status this week; MSFT only AAA tech comp.

Struggling Finnish phonemaker Nokia Oyj.'s (HEX:NOK1V) recovery bid was dealt a blow on Friday when top financial agency Standard & Poor's (S&P) chopped [press release] the company's bonds to a notch into "junk" status.

The S&P rated Nokia's senior unsecured notes at BB+ and rated the company's liquidity at B.  In the bonds world anything below BBB/Baa ratings are considered "junk" -- higher risk investments.

Some countries have seen their credit rated as "junk", including Portugal (BB), Indonesia (BB), and Vietnam (BB).  The U.S. recent lost its coveted triple-A credit rating, being downloaded to AA+, a notch from the top [source].  Many other nations including America's former imperial owner, the United Kingdom and its northern neighbor Canada still enjoy "AAA" credit. 

Credit Rating
[Image Source: Wikimedia Commons]

Fitch also recently downgraded Nokia's bonds to junk status.

A junk credit rating is a worrying sign for investors, but not necessarily a death sentence.  For example, over the last decade Ford Motor Comp. (F) long languished in "junk" status, and only escaped the dubious distinction this week with an upgrade [press release] by Fitch to "BBB-" status, a notch above junk.  

Nokia issued a brief response, citing its cash war chest as one instrument to help it weather the storm:

Espoo, Finland - Timo Ihamuotila, Nokia's Executive Vice President and CFO, comments on today's rating announcement from Standard & Poor's:

"As we have detailed in recent announcements, Nokia is in the middle of a transformation program which encompasses every aspect of our business. We are implementing a decisive action plan to position our company for future growth and success. The main focus of these actions is on lowering the company's costs, improving cash flow and maintaining a strong financial position, while bringing attractive new products to market."

Nokia's financial position remains strong. As of March 31, 2012, Nokia had gross cash balances of EUR 9.8 billion, and a net cash position of EUR 4.9 billion.

Nokia will surely look to do the same as it tries to push through the painful Windows Phone transition.  But the credit downgrades give its critics ammo to use against it, should it slip too far during that process.

An ironic note:
Microsoft Corp. (MSFT), Nokia's partner and Windows Phone BFF is the only tech company to enjoy a perfect triple-A credit rating, at present [source].  Why does the world's most valuable company, Apple, Inc. (AAPL) not have a triple-A rating?  Simple, it never issues bond debt.

Sources: Reuters [downgrade], Nokia [response]

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This article is over a month old, voting and posting comments is disabled

By ramuman on 4/27/2012 1:25:31 PM , Rating: 3
...because they have such a great history of being accurate in their ratings.

RE: Yeah...
By JasonMick on 4/27/2012 1:59:59 PM , Rating: 2
...because they have such a great history of being accurate in their ratings.

In some cases you may be right -- ratings are of course educated speculation -- but that said, I think the big three bureaus tend to do a relatively good job in the long term (which is the ultimate goal in terms of risk analysis).

You have to take into account that it's not just the letter grade. Risk is a combination of outlook (negative/stable/positive) and the letter grade, which largely represents earnings potential. Institutional investors aim for low risk, high returns, so both the outlook and the letter grade are important.

Case and point -- IBM has AA- credit rating, last I checked, but is rated as stable. That means that the company is low-risk, but that its bonds are less rewarding than Microsoft's (the IBM letter grade was also hit by recent stock bybacks).

In other words while the outlook rating tends to be directly correlated to a company's growth or shrinkage, a company's letter grade rating is correlated in more than one direction to its fiscal success or lack-thereof, making it confusing to the average member of the public.

In Nokia's case (like Ford's a few years ago) there is both a shrinkage in fiscals and not enough reward to offset it. The outlook is indeed negative -- smartphone sales have fallen in half in the last year.

The issue is not that S&P is wrong in responding to and noting that risk; the issue is that various news sites report on this and then non-experts perceive it as a worse problem than it really is.

For example, some non-expert members of the public might perceive IBM's recent downgrade as a sign the company is struggling, when in fact it is extremely strong (hence the "stable" rating on a multi-billion dollar earner).

In that regard while the ratings agencies due provide institutional investors a valuable product, they also are somewhat disruptive of the market they're studying -- kind of like the Heisenberg uncertainty principle of the financial world. :)

"There's no chance that the iPhone is going to get any significant market share. No chance." -- Microsoft CEO Steve Ballmer

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