NEW YORK-Moody’s Investors Service Inc. has assigned Prime-1 short-term ratings to a planned commercial paper program by Nokia Corp. and two of its subsidiaries.
Nokia and its two guaranteed subsidiaries, Nokia Finance International B.V. and Nokia Treasury Pte. Ltd., are expected to issue as much as $500 million collectively of commercial paper, fully backed by multiyear bank credit facilities.
While the short-term outlook for Nokia is good, the New York-based debt rating agency also anticipates that Nokia will experience several significant challenges: “to keep production capacities in line with shifts in customer demand; to broaden its product range, and, longer term, to defend its technological edge against larger competitors in a consolidating and technologically evolving industry.”
Moody’s predicts that the telecommunications equipment sector will consolidate in coming years, leaving only a handful of major players. The primary reason for the predicted consolidation is the large research and development investment required in order to “accelerate product cycles to protect (profit) margins.”
So far, Nokia has been a leader in innovation in digital handsets, continually adding features to these phones in order to reduce competitive pressures. It is now developing the mobile office, which combines voice and data communications for business users.
Moody’s said its Prime-1 ratings “are based on Nokia’s leading position in the fast-growing market for digital mobile telephone equipment and handsets, its technological edge in mobile data communications and its strong cash flow that, to date, has allowed for a modestly leveraged capital structure.”
Over time, however, the rating agency predicts Nokia increasingly will tap into its debt capacity to meet its customers’ demand for assistance in financing equipment purchases for their new systems.
Headquartered in Helsinki, Finland, the international telecommunications equipment and systems manufacturer had net sales last year of about $8.5 billion. By year-end 1995, Nokia had started installing Global System for Mobile communications infrastructures for 38 mobile telephone carriers in 25 countries.
Despite anticipated pressure on profit margins in the systems segment of wireless equipment, Moody’s said it expects that “the continuing geographic expansion of GSM and the long-term nature of (Nokia’s) installation contracts will provide a stable base for future cash flows.”
But it also issued several cautionary advisories: first, that pure replacement demand once initial systems are installed usually isn’t enough to sustain initial profit margins; second, that once digital mobile telephone technology matures, competition increases and handset prices decline. Downward price pressures already are manifesting themselves, Moody’s noted.
