DBRS Confirms Volkswagen at A (low), Trend Stable

DBRS has today confirmed the ratings of Volkswagen AG (VW or the Company), including its Issuer Rating at A (low). The ratings incorporate VW’s strong business profile as the world’s third largest automotive manufacturer with impressive product and geographic diversification. The Company’s financial position continues to be robust, with the automotive operations having a sizeable net cash position. The trend on the ratings remains Stable, reflective of VW’s solid operating performance, with the Company continuing to outperform its competition across most geographic markets and achieve ongoing gains in global market share.

VW’s results in 2010 through the first half of 2011 have been attaining record levels and show dramatic improvement over 2009 earnings, which were materially adversely affected by the economic downturn. Sharply higher volumes, favourable pricing and mix effects, along with ongoing cost efficiencies, are the primary contributing factors. While the Company is achieving sales gains across all markets, growth in Asia-Pacific continues to be strongest, with this region now accounting for half of VW’s total unit vehicle sales. Audi continues to generate the highest profitability among the Company’s portfolio of nine brands. However, earnings of the core Volkswagen brand have shown particularly strong growth and are now approaching those of Audi. Additionally, profitability of Scania and VW’s commercial vehicles has also increased substantially, in line with the recovery of the global trucking industry.

The Company remains active in its efforts to create an integrated trucking company, with closer ties between its commercial vehicles division, Scania and MAN SE (MAN). In May 2011, VW increased its holdings in MAN above 30%, with the Company subsequently making a mandatory offer (under German law) to all MAN shareholders to acquire their shares. The results of the purchase offer were recently revealed, with VW’s stake in MAN increasing to 55.9% of voting rights (53.7% of share capital). Upon achieving merger control clearance, this will result in a cash outflow of approximately EUR 3.4 billion, which would be readily absorbed by the Company’s abundant liquidity position (in excess of EUR 25 billion as of June 30, 2011). VW hopes to further develop trucks and buses into a core strategic area while also tapping substantial synergies that have thus far been hindered by regulatory/antitrust restrictions.

While the Company ranks as the third largest global auto manufacturer and the leader in Europe, its business profile is further bolstered by its strong and increasing presence in emerging markets, particularly China (operating results of Chinese joint ventures are accounted for using the equity method). In 2010, the Company solidified its status as the leader in the world’s largest automotive market, with unit sales increasing to 1.9 million units (from 1.4 million the prior year). The migration of VW’s global sales footprint positions it favourably, given that emerging markets will likely represent the predominant source of growth in the automotive industry going forward. VW’s recent investment in Suzuki Motor Corporation (Suzuki) also serves to boost the Company’s presence in markets such as India, Southeast Asia and Japan (although future cooperation with Suzuki remains subject to further discussions between the two companies).

Regarding North America, while VW’s operations in this region benefited from the moderate recovery in the U.S. market, strong competition and foreign exchange headwinds result in the Company still incurring losses in the region. However, the recently revised Jetta has been selling in considerably higher numbers relative to its predecessor. More importantly, VW significantly increased its North American presence with the May 2011 opening of a plant in Chattanooga, Tennessee, which will produce a new Passat model that is both specifically designed for the region and aggressively priced. The new Chattanooga plant will serve to lower production costs and alleviate adverse currency effects, which, combined with higher sales volumes, should enable VW to generate profits in that market over the near to medium term.

With the planned merger with Porsche, the Company’s portfolio will increase to ten brands. While VW has a very strong track record of integrating previous acquisitions, the attempted integration with Porsche poses particular challenges. Capital increases at both VW and Porsche (in the amounts of EUR 4.1 billion and EUR 4.9 billion, respectively) have been implemented to alleviate the financial impact of the integration; this is viewed very positively by DBRS. However, uncertainties remain concerning the potential tax liabilities associated with the integration. Additionally, various U.S. hedge funds have initiated legal proceedings against Porsche (stemming from losses incurred as a result of VW’s short squeeze in late 2008). While DBRS believes that the VW – Porsche integration will ultimately take place, the timing and financial impacts remain uncertain, with the Company possibly having to exercise its call option (from late 2012 to early 2015) on Porsche instead of the planned merger.

With its strong presence in emerging markets bolstering growth prospects, VW is very well positioned to benefit from the ongoing projected growth of the global automotive industry. DBRS considers the ratings to be subject to future positive rating action once there is further resolution regarding the Company’s expected combination with Porsche. DBRS notes that VW’s financial profile remains strong and effectively exceeds the assigned ratings. However, DBRS also observes that persisting economic headwinds in the United States and particularly in Europe could yet derail the recovery in these developed markets (and potentially trigger another downturn). Such events could potentially affect the Company’s future earnings performance (although likely not to a degree that would jeopardize the current ratings, given VW’s very solid financial profile). However, in the event that the eventual integration with Porsche results in a material change in the Company’s financial profile, this would trigger an event-driven review of the ratings.

Notes:
All figures are in Euros unless otherwise noted.

The ratings of Volkswagen Canada Inc. and VW Credit Canada Inc. are based on a guarantee of Volkswagen AG.

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