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Monday’s announcement that Microsoft intends to purchase Nokia’s handset business and license the company’s patents for a total of $7.2 billion has provided a major boost to Nokia’s bonds and highlights the investment case for investing in “fallen angels,” according to
Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“It is expected that Nokia will continue to exist and will move to focus on its network equipment business,” said Rodilosso. “I believe it will still be in a very competitive space, but the cash infusion from this deal, should it be completed, will be a big credit positive for the company and highlights one of the investment theses behind focusing on fallen angels.”
“In this case, we are dealing with a long established player and brand name in the handset business which, despite its falling market share and worsening business prospects, still possesses attractive assets that hold significant value,” he continued. “Rated B+ on average by the major rating agencies, Nokia’s debt may soon be considered for potential upgrades based on the success of this deal, which is expected to close in early 2014.”
Rodilosso pointed to another significant telecommunications player and “fallen angel,” Sprint, which has experienced very positive credit events in the past 12 months as Japan’s Softbank emerged as the leading suitor of the company.
“Part of the attractiveness of fallen angel bonds is that the issuers, formerly investment grade companies, tend to be larger, more established players in their lines of business,” said Rodilosso. “While some of these companies continue to decline, there is often value to be tapped in brand names, patents, capacity and various other factors. It is also helpful from a bond investor’s perspective that often a major goal of management of these companies is to regain their investment grade status.”