DBRS Places Volkswagen Under Review with Negative Implications

DBRS Limited (DBRS) has today placed the long-term ratings of Volkswagen AG (VW or the Company) Under Review with Negative Implications. (The short-term ratings remain herein confirmed at R-1 (low) with a Stable trend in light of the Company’s very solid liquidity position.) The rating action follows VW’s announcement yesterday that, with respect to emissions, some 11 million diesel vehicles worldwide generate noticeable deviations between bench-test results and actual road use. Moreover, the Company also indicated that it plans to take provisions in the amount of approximately EUR 6.5 billion in the forthcoming quarter (ending September 30, 2015) to cover necessary measures and other efforts to win back lost trust of its customers. The Company also added that the provisions may be subject to revaluation.

VW’s announcement follows that of the U.S. Environmental Protection Agency (EPA; dated September 18, 2015) that it had issued the Company a notice of violation of the Clean Air Act, alleging that four-cylinder Volkswagen and Audi diesel cars from model years 2009 to 2015 include software that circumvents EPA emissions standards for certain air pollutants (the EPA statement covered roughly 482,000 diesel passenger cars sold in the United States since 2008). The EPA added that the Company faces fines of a maximum potential amount of USD 37.5 thousand per vehicle, which could theoretically total USD 18 billion (given the population of affected vehicles in the United States).

While DBRS notes that the USD 18 billion cited by the EPA represents a theoretical maximum that, in all likelihood, would not be assessed in its entirety, DBRS nonetheless considers it quite probable that the imposed fine will prove to be substantial. Moreover, the Company faces potential fines from additional regulatory authorities (including, among others, the U.S. Department of Justice), not only in the United Sates but in other jurisdictions worldwide. VW also likely faces extensive civil litigation in the form of class-action lawsuits from VW vehicle owners/investors. All of the above are in addition to the actual warranty/recall costs to be incurred by the Company in retrofitting the affected vehicle population.

DBRS notes that VW’s liquidity position is robust. As of June 30, 2015, the net liquidity of the industrial operations amounted to roughly EUR 21.5 billion (as indicated by the Company). Moreover, VW’s liquidity stands to be further bolstered by the forthcoming divestiture of its 19.9% ownership stake in Suzuki Motor Corporation, the proceeds of which are anticipated to exceed EUR 3 billion. This notwithstanding, the total ultimate costs associated with the emerging emissions controversy will likely prove substantial and remain subject to significant uncertainty. Moreover, the eventual impact of the emissions controversy on the future sales/market share(s) of the Company’s various brands, their reputation and, by extension, VW’s business risk profile remains to be determined.

DBRS’s credit review will assess ongoing developments, including any additional recalls or actions taken by regulatory authorities in the United States and across the globe as well as the Company’s vehicle sales in the upcoming months, all of which would help to assess whether the Company’s current problems will ultimately have a long-term impact. DBRS notes that, notwithstanding the confirmation of VW’s short-term ratings (with a Stable trend), in the event of a subsequent negative rating action of more than one notch in the Company’s long-term ratings, VW’s short-term ratings could also be subject to a negative rating action.

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 (November 2014), Global Methodology for Rating Finance Companies (October 2014) and Preferred Share and Hybrid Criteria for Corporate Issuers (January 2015), which can be found on our website under Methodologies.

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