Moody's downgrades Nokia to near-junk status

Ratings agency Moody's has lowered its debt rating for Nokia to near junk status, and warned that the company is facing even tougher times ahead.

In a note to investors today Moody's cut the world's largest mobile handset manufacturer's rating from Baa2 to Baa3, its lowest rating for investment grade stock.

While the trigger for the downgrade was last week's less-than-inspiring financial results, Moody's warns that Nokia faces a rough road ahead in its smartphone business and further downgrades are possible.

"Nokia's transition in its Smart Devices from Symbian-based phones to the Windows-based Lumia devices is proving more challenging than expected given that sales of Symbian-based devices are falling off very quickly while Lumia sales are only ramping up slowly," the note reads. "Nokia's current Baa3 rating reflects Moody's expectation that Lumia devices will be accepted in the market in 2012 with the help of price and marketing support and that it will become the third smartphone system next to Google's Android and Apple's iOS."

No doubt Nokia's management, and Microsoft's for that matter, are hoping that Windows Phone will be a massive hit and grow to rival Android and iOS, but there's a huge way to go. In the meantime Nokia's low-end phone business is being rapidly eroded by cheap Chinese competition Moody's notes, while the agency predicts more money will be needed to support joint venture Nokia Siemens Networks next year.

It's not all doom and gloom for the Finns however. Moody's notes that Nokia has reserves of around €10bn, roughly double its debt, and the company now has the Lumia line well in hand, even if it is having to give some away free.

Moody's said it would upgrade Nokia again if it showed evidence of increasing margins or got a lot of support from buyers for the Lumia range. However, a further downgrade is promised if things continue to get worse.

You could argue that Moody's was one of the ratings agencies that consistently passed off sub-prime debt as investment grade material in the noughties and that it may well be wrong – indeed, Nokia's share price rose slightly on Monday. But more than a few analysts are now seriously concerned about Nokia's future, with the company losing both staff and customers, and in an alliance with Microsoft to push an unpopular mobile operating system. ®