DBRS Comments on Volkswagen AG’s Announced Strategic Alliance with Navistar International Corporation

DBRS Limited (DBRS) today notes that Volkswagen AG (VW or the Company) announced on September 6, 2016, that Volkswagen Truck and Bus GmbH (VW Truck & Bus, a Company subsidiary) has agreed to subscribe to a capital increase of Navistar International Corporation (Navistar) that will result in VW Truck & Bus assuming a 16.6% stake in Navistar (VW’s investment amounting to $256 million). DBRS observes that yesterday’s announcement has no impact on VW’s ratings, with the long-term ratings remaining at BBB (high) with a Negative trend, significantly reflecting the Company’s ongoing (diesel) vehicle emissions issue of the core automotive business that arose in September 2015.

Further to VW’s announcement regarding Navistar (the Announcement), in addition to VW Truck & Bus taking a 16.6% stake in Navistar, the two companies intend to enter into definitive agreements to collaborate on technology development and also expect to form a joint venture for purchasing/procurement purposes. Finally, VW Truck & Bus will have the right to appoint two directors to Navistar’s board of directors.

While there is no impact to VW’s ratings, DBRS considers the Announcement to be moderately positive to the Company’s business risk profile, as through Navistar, the geographic footprint of VW Truck & Bus is effectively expanded to include North America, a major regional truck market thus far unaddressed by VW Truck & Bus’s existing brands of MAN, Scania and Volkswagen Camnihões e Ȏnibus, which collectively have a major presence in Europe and Latin America. Moreover, DBRS further notes that synergies resulting from the coordinated efforts of VW Truck & Bus and Navistar in areas such as new technology development and procurement could prove material, with Navistar estimating cumulative synergies over the first five years to total $500 million. DBRS notes further that the $256 million investment of VW into Navistar is readily absorbed by the Company’s currently strong financial position, with net liquidity of the automotive operations as of June 30, 2016, amounting to EUR 28.8 billion (as reported by the Company), although DBRS observes that VW’s liquidity position stands to be meaningfully depleted pending further developments regarding the (diesel) vehicle emissions controversy.

DBRS will continue to monitor ongoing developments associated with yesterday’s Announcement (with the transaction remaining subject to regulatory approvals), although DBRS points out that any future rating action(s) involving VW will more than likely be a function of the progress of the Company’s (diesel) vehicle emissions controversy.

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

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

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