Ericsson Cut to Junk as Moody's Sees Risks in CEO's Strategy (2)

(Bloomberg) -- Ericsson AB’s credit rating was cut to junk by Moody’s Investors Service, in a blow to new Chief Executive Officer Borje Ekholm, as the ratings company highlighted risks to his plan for turning the struggling Swedish telecom-equipment maker around.

The downgrade, marking the first time since 2005 that Ericsson has been rated junk, pushed the yield on the company’s 500 million-euro bond maturing 2021 up as much as 21 basis points to 1.03 percent.

Provisions and restructuring charges will lead to “credit metrics that will no longer be commensurate with investment-grade ratings," analyst Alejandro Nunez said in a statement as Moody’s lowered Ericsson’s senior unsecured long-term rating to Ba1 from Baa3. The company had an A3 rating as recently as 2014 and Wednesday’s cut was the third in less than seven months.

Moody’s action underscores the steep challenges facing Ekholm as he tries to engineer a turnaround at Ericsson. Sales continue to slide at double-digit percentage rates as competitor Nokia Oyj shows signs of stabilizing. Ekholm has vowed to intensify efforts to cut costs and get rid of more than $1 billion in unprofitable contracts in his bid to revive the company while maintaining necessary investments in the core networks business.

“A strategy premised primarily on cost-cutting is not sustainable over the long run” and could hurt Ericsson’s competitiveness and its ability to innovate, Moody’s said. This conundrum has been recognized by Ekholm, who told Bloomberg TV last month that the company needs to simultaneously reduce costs and invest to prepare for the coming roll-out of the next generation of mobile networks.

“We need to do something that’s difficult, to keep one foot on the gas pedal and one foot on the brakes,” Ekholm said at the time. “We need to make sure that we invest enough to be technology leaders.”

The downgrade puts Ericsson’s rating on the same level as Nokia, which was upgraded by Moody’s last year based on the benefit of a diversified offering following the Finnish company’s acquisition of French rival Alcatel-Lucent.

Shares of Ericsson fell as much as 2.7 percent and were trading 2.6 percent lower at 57.30 kronor as of 1:29 p.m. in Stockholm.

(Updates with rating history, bond yield in second paragraph.)

--With assistance from Tasneem Hanfi Brögger

To contact the reporter on this story: Niclas Rolander in Stockholm at nrolander@bloomberg.net.

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, Kim Robert McLaughlin, Ville Heiskanen

©2017 Bloomberg L.P.