DBRS Changes Trend on Volkswagen AG to Stable from Negative, Confirms Ratings at BBB (high)

DBRS Limited (DBRS) confirmed the long- and short-term ratings of Volkswagen AG (VW or the Company) and VW Credit Canada Inc. at BBB (high) and R-2 (high), respectively. Concurrently, DBRS discontinued the Senior Unsecured Debt and Commercial Paper ratings of Volkswagen Canada Inc. at the request of the Company. The ratings confirmations reflect VW’s solid business risk assessment (BRA) as an automotive original equipment manufacturer (OEM) of substantial scale with a highly diversified brand portfolio. Moreover, the Company’s sales and earnings performance (absent non-recurring items) has proven resilient, notwithstanding the considerable negative publicity associated with the Company’s diesel issue (the Diesel Issue). In addition to the above, the trends on the ratings have been changed to Stable from Negative, in part because DBRS recognizes that VW has made considerable progress with respect to the Diesel Issue, particularly in the United States where the Company has reached settlements with various legal and regulatory authorities and reached agreements concerning vehicle buybacks and owner compensation. While VW may yet face additional actions from consumers and regulatory authorities in other jurisdictions, notably Europe, these are currently not estimated to approach the cost of those faced by the Company in the United States, with VW’s liquidity position expected to be sufficient to fund both ongoing and currently foreseeable cash outflows related to the Diesel Issue. The above notwithstanding, DBRS notes that the Company’s ratings remain negatively affected by VW’s ongoing corporate governance challenges.

The Company’s financial performance has remained solid, with operating profit of the Automotive operations at EUR 12.2 billion (excluding special items that included additional Diesel Issue-related provisions of EUR 6.4 billion) and EUR 7.7 billion in 2016 and H1 2017, respectively. Moreover, while VW’s recent sales growth has moderately lagged that of the industry, volumes have nonetheless remained at firm levels, as the Company’s 2016 deliveries to customers were 10.3 million units globally, improving by 3.7% year over year. Through the first seven months of 2017, volumes further increased by 1.3% versus the similar prior-year period, with VW remaining on track to continue as the world’s leading (in volume terms) automotive OEM.

As a consequence of the Diesel Issue, VW has recognized substantial provisions to date totalling EUR 22.6 billion (with the Company recently disclosing that it expects to recognize an additional EUR 2.5 billion in Q3 2017 as a result of increased costs associated with the buyback/retrofit of affected diesel vehicles in North America). Moreover, after having incurred approximately EUR 3 billion in associated cash outflows in 2016, additional outflows through the first half of 2017 have totalled EUR 12 billion. While the Company’s liquidity has as a result been meaningfully depleted, this has been considerably offset by solid operating cash flow in H1 2017 in the amount of EUR 14.8 billion (absent effects of the Diesel Issue) in addition to proceeds of EUR 3.5 billion from the Company’s recent hybrid bond issuance. As such, VW’s liquidity position remains substantial, with the Automotive division’s net liquidity (as outlined by the Company) as of June 30, 2017, amounting to EUR 23.7 billion. While VW faces additional cash outflows in connection with the Diesel Issue in H2 2017 and over the near to medium term, these are currently estimated to be of a substantially smaller magnitude going forward and well absorbed by the Company’s liquidity. Moreover, VW’s financial risk assessment (FRA) remains robust, with credit metrics exceeding levels commensurate with the existing ratings and the Automotive operations having a net cash position of EUR 14.9 billion as of June 30, 2017. DBRS notes further that, despite the costs of the Diesel Issue, capital and research and development expenditures have been maintained by VW at essentially historical levels, with dividend payments (that were substantially curtailed in 2016) also increasing considerably this year.

DBRS notes that additional adverse outcomes of the Diesel Issue that are larger in scale than currently anticipated could still result in negative rating actions. However, absent such developments and assuming that the Company’s operating performance remains on track, VW’s existing BRA and FRA profiles would ultimately warrant a ratings upgrade, although DBRS further notes that measures taken by the Company to address its corporate governance challenges (underscored by the onset of the Diesel Issue) have thus far proven somewhat incomplete, thereby limiting the upward migration of the ratings.

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.

The principal methodology is Rating Companies in the Automotive Manufacturing Industry (October 2016), which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS did have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This rating was initiated at the request of the rated entity.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com