DBRS Confirms Volkswagen AG Following Its Planned Combination with Porsche

DBRS is today confirming the ratings of Volkswagen AG (VW or the Company), including its Issuer Rating at A (low) with a Stable trend, following its recent announcement that VW’s supervisory board had approved a comprehensive agreement (the Agreement) regarding an integrated automotive group with Porsche Automobil Holding SE (Porsche SE), which is the holding company of Porsche AG (Porsche), the production subsidiary company. The proposed merger with Porsche SE (the Merger) is to be executed through a series of transactions with a currently estimated timeline from 2009 through 2011. DBRS notes that the Merger would be positive for VW’s business profile, as Porsche is a premium sports vehicle manufacturer of consistently high margins that would expand the Company’s portfolio to ten brands. Additionally, based on supporting transactions that include significant capital increases leading up to the Merger, DBRS notes that VW’s financial profile is likely to remain consistent with the currently assigned ratings, which therefore remain unaffected by the Agreement.

The Agreement follows a failed attempt by Porsche SE to acquire control of VW, through which it had amassed an associated debt burden of more than EUR10 billion. However, DBRS notes that VW has undertaken measures to mitigate the potential adverse impacts of the Merger on its financial profile through a series of supporting transactions to be executed sequentially prior to the Merger’s culmination, expected in 2011.

First, the State of Qatar has acquired the portfolio of options on VW shares from Porsche SE. While the State of Qatar’s exact future shareholding has yet to be disclosed, it is expected to be the third largest stakeholder in VW, behind the Porsche and Piech families and the State of Lower Saxony. Second, Porsche SE is seeking to renew its EUR10 billion syndicated financing through the completion of the Merger. VW has publicly indicated that both steps are necessary prior to its EUR3.3 billion acquisition of an initial 42% equity stake in Porsche AG, currently anticipated to be completed toward the end of this year.

DBRS notes that despite the significant headwinds that have prevailed in the automotive industry over the past year, VW’s financial profile remains strong. As of June 30, 2009, the Company’s industrial operations had a net liquidity position of EUR12.3 billion. This notwithstanding, VW is planning a capital increase of not less than EUR4 billion (through the issuance of new preferred shares) in the first half of 2010 in order to essentially replenish its liquidity position following its initial equity investment in Porsche AG.

Regarding the respective debt of Porsche SE and Porsche AG, DBRS notes that such debt will not be guaranteed or otherwise formally supported by VW through the completion of the Merger, after which it is expected that both companies will eventually be fully consolidated. With respect to Porsche SE’s debt, (in the amount of approximately EUR10.7 billion and essentially consisting of its syndicated facility), it is anticipated that the significant majority will be paid down through the following transactions:

(1) VW’s EUR3.3 billion acquisition of a 42% interest in Porsche;
(2) The Company’s planned 2011 acquisition of Porsche Holding Salzburg (valued at approximately EUR3.55 billion) – of which the majority of proceeds will also be ultimately allocated toward the repayment of Porsche SE debt; and
(3) A planned capital increase in 2011 of Porsche SE of an amount in the range of EUR5 billion to EUR6 billion – (of which the Porsche/Piech family shareholders will contribute their sales proceeds from the sale of Porsche Holding Salzburg).

Based on the above, additional debt imposed on VW by the Merger will essentially consist of that at Porsche AG, whose net debt position is presently in the amount of approximately EUR4.5 billion. After assuming this debt and taking into account the Company’s planned equity increase of EUR4 billion in early 2010, DBRS notes that VW’s credit metrics remain commensurate with the currently assigned ratings on an estimated pro forma basis.

In conclusion, DBRS is confirming the Company’s ratings based on the opinion that the Merger, as planned and in isolation, will be beneficial to the business profile of VW while its financial profile is not expected to be materially adversely impacted. However, DBRS notes that this opinion is based on (among other items) a series of planned capital increases both at the VW and the Porsche SE level. In the event that any of these transactions are not essentially executed, this would likely trigger an event-driven review of the ratings.

Notes:
All figures are in euro unless otherwise noted.

The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate (Autos & Auto Parts) rating.