Nokia Oyj’s rating was cut to junk for the first time by a debt rating company as the Finnish mobile-phone maker loses its grip on a market now dominated by Apple Inc. and Asian suppliers such as Samsung Electronics Co.

Fitch Ratings Tuesday lowered Nokia’s long-term debt ranking to BB+, one step below investment grade, citing a deterioration in the handset business in the first quarter and a “general lack of visibility.” Fitch said it may further cut the rating if Espoo, Finland-based Nokia’s revenue doesn’t stabilize and operating margins don’t return to positive. The decision covers about 4.9 billion euros ($6.5 billion) in debt. 

The cost of insuring against default on Nokia’s debt surged to a record. Nokia is burning cash 14 months after linking up with Microsoft Corp. to make phones that run on the Windows operating system. The company this month reported a first- quarter operating loss for its handset unit and said the margins would be similar or worse in the current period.

“In order to avoid further negative rating action, Nokia needs to demonstrate substantial improvements” through 2013, Fitch analyst Owen Fenton wrote in a report. “Given the potential headwinds facing the company, Fitch is currently not convinced that Nokia can attain this over the course of 18 months.”

Credit-default swaps on Nokia bonds rose 55 basis points to 590 basis points, according to data compiled by Bloomberg. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

In 2002, Fitch rated Nokia’s debt A+, the fifth-highest investment grade. Standard & Poor’s and Moody’s currently rank the debt one step above junk.

The shares fell 3 percent to 2.63 euros at 2:10 p.m. in Helsinki, the lowest since December 1996.

Nokia that took in almost half the global revenue from smartphones in 2007 now claims only 10 percent of the $219 billion per year market, Bloomberg data show. Nokia will continue to increase its focus on lowering the company’s cost structure, improving cash flow and maintaining a strong financial position, Chief Financial Officer Timo Ihamuotila said in a statement.

The company had about 4.9 billion euros in net cash at the end of the first quarter.

“In terms of the cash, Nokia has announced quite significant restructuring charges that will probably be front- end loaded and they will probably start paying them down quite fast,” Fenton said in an interview. “The cash balance could also be depleted by continuing negative operating cash flow.” 

(Bloomberg)