DBRS Confirms Volkswagen AG at “A,” Trend Stable

DBRS has today confirmed the Issuer Rating of Volkswagen AG (VW or the Company) at “A” and the long- and short-term ratings of the Company’s subsidiaries at “A” and R-1 (low), respectively. The trends are Stable. The confirmations reflect VW’s strong business profile as the world’s third-largest automotive manufacturer with a highly diversified brand portfolio, consisting of volume brands in addition to a strong presence in the premium segment. Moreover, notwithstanding substantial financial outlays in recent years (in line with the Company’s growth and brand conglomeration objectives), VW maintained a conservative financial policy throughout this process (by way of repeated issuances of equity and hybrid capital) such that credit metrics remain commensurate with the ratings.

The Company’s high presence in the premium automotive segment is significant in several aspects. Firstly, premium brands have historically proven to be considerably more resilient to automotive downturns relative to mainstream brands. Additionally, the premium segment not only typically generates considerably stronger margins but is also projected to grow at an appreciably higher rate (notably in emerging markets) vis-à-vis volume brands. Indeed, with the addition of Porsche, the premium segment already accounts for the majority of VW’s earnings (i.e., 51% of consolidated 2013 earnings).

In commercial vehicles, a significant development is VW’s acquisition of essentially all the equity capital of Scania (not previously held by the Company). As such, the Company can proceed with the full integration of MAN and Scania. VW has indicated that, with the purchases of Porsche, MAN and Scania being effectively complete, no significant additional acquisitions are planned in the near to medium term.

The Company’s financial performance continues to be on track, with sales and profit in 2013 through the first half of 2014 trending essentially flat and remaining solid. DBRS also notes that earnings prospects over the near to medium term are quite positive. VW’s native European market is finally expected to resume moderate growth in subsequent years (after having endured a significant and protracted decline). Furthermore, growth in China (to which the Company is significantly exposed while also being among the regional market leaders), while likely moderating relative to recent historical levels, is nonetheless expected to persist at solid single-digit annual rates. Lastly, conditions are projected to remain favourable in North America, where VW’s performance should improve from lackluster levels, given not only the addition of Porsche but also the planned introduction (in 2016) of a large SUV, which represents an important U.S. market segment of typically high margins.

The Stable trend incorporates DBRS’s expectation that VW will maintain its strong financial and business profiles, with the Company’s competitive position being reinforced by its very solid representation in the premium automotive segment, along with its strong presence in emerging markets (which are expected to represent the majority of the global automotive industry’s future growth).

Notes:
All figures are in euros unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Automotive Manufacturing Industry, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Financial Ratios and Accounting Treatments — Non Financial Companies, DBRS Criteria: Guarantees and Other Forms of Explicit Support and Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions), which can be found on our website under Methodologies.