Nokia Oyj is tearing through its cash reserves at an unsustainable rate, raising what some analysts say are serious questions about the struggling Finnish phone maker's ability to stabilize its finances in the months ahead.
With the cost of Nokia's debt rising, the most bearish of analysts in a Reuters poll said the company could even be at risk of default if it fails to slow the burning of its cash.
Over the past five quarters, the onetime darling of mobile telecoms has eroded its cash pile by 2.1 billion euros ($2.7 billion) - a rate that would wipe out its entire 4.9 billion euros reserves in a couple years.
Analysts on average expect the company will burn through almost 2 billion euros more in just three quarters, while the most bearish see the company wiping out its 4.9 billion euros net cash buffer completely next year, a Reuters poll of 30 banks and brokerages showed on Friday.
"In our opinion, the company's ability to repay even its shorter-term 2014 bond could be an issue," said Societe General credit analyst Juliano Torii.
The company, which had more than 10 billion euros in cash on hand in 2007, has two bond issues outstanding, 1.25 billion euros of 5.5 percent bonds maturing in 2014 and 500 million of 6.75 percent notes due in 2019.
The bonds - both junk-rated by Fitch and Standard & Poor's - are trading at record wides versus mid-swaps (a money market benchmark), at around 400 basis points and 683 bp respectively. And those levels may still not be wide enough, some say.
"Nokia's spreads do not reflect the severity of the company's situation," said Torii.
It's also getting more expensive to insure against default.
Five-year credit default swaps (CDS) were at 749 bp on Friday - an all-time high, according to Markit. Since its year-low of 309 in late January, it has therefore increased some 142 percent. According to according to Gavan Nolan, director of credit research at Markit, this implies a default probability of 49 percent over the next five years.
A Nokia spokesman said improving cash flow was an important goal.
"Nokia is implementing a decisive action plan to position our company for future growth and success," spokesman James Etheridge said. "The main focus of these actions is on lowering the company's costs, improving cash flow and maintaining a strong financial position."
No light from lumia
Nokia, which once ruled the mobile phone roost, was wrongfooted by the rise of smartphones. And while it may have hoped the iPhone phenomenon was close to running its course, Apple Inc last month said quarterly profit had almost doubled in the first quarter of 2012, quieting talk that its days of sharp growth were over.
Meanwhile Nokia's response to the iPhone, the Lumia, has not so far demonstrated it can compete.
"Nokia's Lumia was an attempt to catch up, but it was simply too little too late," said Nancy Utterback, credit strategist at Aviva Investors.
"I would not rule out the possibility of Nokia being downgraded further," Utterback said. "The company is in a negative spiral that will be hard to reverse."
Societe Generale analysts this week downgraded Nokia stock - which was down 1.2 percent early on Friday, having slumped to its lowest in about 16 years - to a to "sell" and warned that the company's operating losses and restructuring costs could accelerate a decline in sales.
"Such an additional fall could be enough to burn through most of Nokia's existing cash pile and even bring into question Nokia's very survival," SocGen analyst Andy Perkins said in a note.
Not everyone is quite so pessimistic.
While the most bearish analysts doubt Nokia's ability to retain a cash buffer, the average estimate in the Reuters poll was for the company to end 2012 with 2.8 billion euros in net cash.
If it can succeed in reducing the speed of its cash burn, it would be unlikely to face major hurdles in paying off its shorter-dated bond.
"The group appears to have sufficient liquidity, even under some reasonably onerous operating assumptions," said Jens Vanbrabant, lead portfolio manager at European Credit Management.
And there is some optimism as Nokia gears up production of new smartphones using Microsoft Corp's Windows Phone software. Analysts on average expect Nokia to sell 46 million of the phones next year, compared with 20 million expected this year.
But the rapid reversal in the company's fortunes has given Nokia a steep hill to climb.
"There are chances for Nokia to shape up and recover, but it's going to be tough," one corporate banker said. "The TMT market is fast moving, and even one slip-up can cost a company its whole future."
If Nokia fails to improve its fortunes, some bankers say Microsoft could become a white knight. After all, not only is Lumia's software based on that of Microsoft, it also happens to be Nokia Chief Executive Stephen Elop's former employer.
Microsoft is already paying Nokia $1 billion a year to use its software on Lumia smartphones. And some investment bankers familiar with the technology sector said the support
could extend well beyond that amount, if Nokia's problems intensify.