DBRS Downgrades Volkswagen to A (low) from “A,” Ratings Remain Under Review with Negative Implications

DBRS Limited (DBRS) has today downgraded the long-term ratings of Volkswagen AG (VW or the Company) to A (low) from “A.” All ratings (including the short-term ratings) are Under Review with Negative Implications. The rating action follows ongoing developments associated with VW’s mounting (diesel) vehicle emissions controversy, which may serve to further pressure the Company’s credit risk profile. In early November, the U.S. Environmental Protection Agency (EPA) issued VW a second notice of violation of the Clean Air Act, alleging that light-duty diesel vehicles from model years 2014 through 2016 of the VW, Porsche and Audi brands equipped with 3.0 litre engines contain a defeat device to circumvent EPA emissions standards. (DBRS notes that the Company has thus far disputed the most recent allegations of the EPA, with VW and the EPA having ongoing communications concerning this matter.) VW also subsequently announced that unexplained inconsistencies were found with respect to carbon dioxide (CO2) emissions levels in approximately 800 thousand vehicles. The Company added that it had initially estimated the economic risk associated with the CO2 emissions issue at approximately EUR 2.0 billion (which DBRS assumes is likely to be incurred in the final quarter of 2015), subject to revaluation.

The amount cited above follows the EUR 6.7 billion provision that the Company incurred in the quarter ending September 30, 2015 (following its initial announcement concerning nitrogen oxide (NOx) emissions inconsistencies of some 11 million diesel vehicles worldwide). DBRS notes that provisions announced thus far remain well absorbed by VW’s net liquidity position, which currently remains substantial at EUR 27.8 billion (as indicated by the Company) as of September 30, 2015; however, the ultimate costs to the Company in connection with the escalating (diesel) vehicle emissions controversy will likely prove to be substantial as DBRS estimates that VW will face sizable fines from regulatory authorities in various jurisdictions worldwide in addition to extensive civil litigation in the form of class-action lawsuits from VW vehicle owners/investors.

More significantly, DBRS notes that the more recent announcements could considerably expand the population of vehicles affected by the controversy, which was initially constrained to small-displacement diesel models primarily of the Volkswagen brand. The EPA’s second notice of violation to the Company included models of VW’s premium brands, notably Porsche and Audi. Moreover, VW’s statement with respect to CO2 emissions irregularities would also seem to apply (at least in small part) to models equipped with petrol (as well as diesel) engines. In line with the above, the (diesel) vehicle emissions controversy could meaningfully implicate the Company’s premium brands that represent the majority of VW’s total industrial earnings in addition to models with petrol engines that typically have the highest vehicle penetration rate across most major market regions with the exception of Europe, although China (a major market for the Company) is not affected by the CO2 emissions irregularities. The eventual impact of the emissions controversy on VW’s business risk profile could, therefore, meaningfully escalate.

Finally, DBRS is becomingly increasingly concerned about VW’s corporate governance. Subsequent to the Company’s initial admission regarding NOx emission irregularities, VW’s pace in dealing with the controversy is proving to be rather protracted. Moreover, the composition of the Company’s supervisory board (with very little external representation) also serves to somewhat question its level of conviction in expeditiously and transparently addressing the controversy.

DBRS will continue to 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 the ultimate extent and duration of the (diesel) vehicle emissions controversy on VW’s credit profile.

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 and Global Methodology for Rating Finance Companies, which can be found on our website under Methodologies.

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