DBRS Comments on Volkswagen’s Announced Settlement with U.S. Regulators and Private Plaintiffs

DBRS Limited (DBRS) today notes that Volkswagen AG (VW or the Company) announced on June 28, 2016, a settlement (the Settlement) with the United States Department of Justice (DOJ) and the State of California and the U.S. Federal Trade Commission, as well as the collective representation of private plaintiffs, to resolve civil claims associated with approximately 475,000 Volkswagen and Audi 2.0L TDI diesel engine-equipped vehicles in the United States. Taking into account all components (see details below), the Settlement may cost VW up to a maximum total of $14.7 billion (to be paid, however, over several years). While the announced Settlement provides additional clarity to the developments of April 2016 (when it was disclosed that the Company had reached an agreement in principle with U.S. authorities), the financial impact to VW was already largely anticipated in DBRS’s prior rating action of April 26, 2016, when the Company’s long-term ratings were downgraded to BBB (high) with a Negative trend (for further details, please refer to the DBRS press release dated April 26, 2016). As such, there is no additional rating action as a result of the announced Settlement (which remains subject to additional approvals).

The Settlement essentially consists of three components. The first component consists of proposed vehicle buybacks, lease terminations, emissions modifications (subject to approval) and cash payments, collectively under which VW is to establish a maximum funding pool of $10 billion. Secondly, VW is to pay $2.7 billion over three years into an environmental trust to remediate excess nitrogen oxide (NOx) emissions from 2.0L TDI vehicles. Thirdly, the Company is to invest $2.0 billion over ten years in zero emissions vehicle infrastructure, access and awareness initiatives.

DBRS deems the announced Settlement to be modestly positive to VW’s business and financial risk profiles in that it removes considerable uncertainty over the Company’s forthcoming U.S. obligations stemming from its diesel emissions controversy. Additionally, VW has indicated that it will not need to incur additional provisions (that totalled EUR 16.2 billion in 2015) as a result of the Settlement. However, DBRS notes further that the Company still remains subject to likely additional costs, not only in the United States but also in other jurisdictions, which collectively can still prove sizable. In the United States, the Company has yet to reach any resolution with respect to approximately 113,000 3.0L TDI vehicles (that also include the Audi and Porsche brands); moreover, VW still likely faces additional civil and criminal fines, including the lawsuit filed by the DOJ (for the alleged violation of environmental laws) in January 2016. Finally, VW continues to be confronted with forthcoming legal challenges in many other jurisdictions, most notably Europe. DBRS notes, however, that VW’s liquidity position remains substantial, with gross liquidity of the Automotive operations (recently bolstered by the Company’s divestiture of its 50% stake in LeasePlan Corporation NV) as of March 31, 2016, amounting to EUR 38.2 billion (consisting of EUR 26.1 billion in cash balances and EUR 12.1 billion in marketable securities).

DBRS will continue to monitor ongoing developments stemming from VW’s emissions controversy, including the ongoing performance of the Company’s vehicle sales, which, despite some softening in volumes of the namesake Volkswagen brand, have thus far proven quite resilient.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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

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