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

DBRS Limited (DBRS) changed the trends on the long- and short-term ratings of Volkswagen AG (VW or the Company) and VW Credit Canada Inc. to Positive from Stable, recognizing the Company’s strong financial risk assessment with credit metrics persisting at levels above the current ratings. DBRS also confirmed the ratings at BBB (high) and R-2 (high), respectively. The confirmations reflect VW’s solid business risk assessment as an automotive original equipment manufacturer (OEM) of substantial scale with a highly diversified brand portfolio. Additionally, DBRS notes that VW has considerably addressed its diesel issues (the Diesel Issue) and has likely incurred the significant majority of associated cash outflows with the Company’s liquidity position remaining at strong levels (although numerous — primarily civil — actions remain outstanding across various jurisdictions).

The Company’s financial performance has proven resilient to the Diesel Issue, with Automotive operations having generated sound operating margins of 5.7% and 6.8% in 2017 and in the first half of 2018, respectively, even on an unadjusted basis (i.e., including associated charges). Additionally, VW’s recent sales growth has exceeded that of the industry, with global market share in 2017 slightly improving to 12.1% from the 2016 level of 11.9%. Moreover, through the first eight months of 2018, volumes further increased by 7.5% compared with 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 provisions from 2015 through June 30, 2018, that have totalled EUR 27.4 billion (this figure is slated to increase by EUR 800 million given the fine recently imposed by the Munich II public prosecutor against Audi AG), with associated cash outflows amounting to approximately EUR 22 billion. These amounts notwithstanding, DBRS notes that the Company’s liquidity position has remained robust given solid earnings/cash flow generation over this period, bolstered by capital market issuances (in the form of hybrid notes) of approximately EUR 6.3 billion. DBRS also notes that VW sustained its capital expenditures at essentially constant levels through the Diesel Issue, with dividends also progressively increasing to recent historical levels.

While additional substantially adverse outcomes of the Diesel Issue could still result in negative rating actions, DBRS deems this rather unlikely, with additional related cash outflows estimated to be of a considerably lesser magnitude going forward and well absorbed by the Company’s liquidity position. DBRS acknowledges VW’s weakening sales in important markets such as China and Europe, although this largely reflects industry headwinds in line with trade uncertainties and new emissions regulations in the respective regions and as such is estimated to be manageable. Assuming the Company’s operating performance remains essentially on track, DBRS anticipates upgrading the ratings within 2019. The above notwithstanding, DBRS notes that the ratings remain negatively affected by VW’s ongoing corporate governance challenges, which could limit the upward migration thereof to historical levels (i.e., prior to the onset of the Diesel Issue).
 
Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries, DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers, DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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