DBRS Morningstar Assigns Issuer Rating of A (low) With a Stable Trend to Volkswagen International Finance N.V.

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of A (low) with a Stable trend to Volkswagen International Finance N.V. (VWIF). VWIF’s credit rating is consistent with that of its ultimate parent, Volkswagen AG (VW or the Company). VW provides a parent guarantee in support of VWIF’s senior notes. This guarantee, as well as DBRS Morningstar’s assessment of additional implicit support considerations (including but not limited to business, reputational, and financial factors that are likely to motivate a parent or affiliated company to support its subsidiary issuer), result in a flow-through of VW’s Issuer Rating to VWIF.

Given the flow-through of VW’s credit rating to VWIF, any change in the credit rating of VW would directly result in a corresponding (i.e., 1-to-1 relationship) change in the credit rating of VWIF. Consistent with the Stable trend, DBRS Morningstar expects the credit rating to remain constant over the near to medium term and notes that VW’s Financial Risk Assessment provides some cushion against unexpected challenges at the current credit rating level, rendering a downgrade rather unlikely. Conversely, an upgrade is not likely over the aforementioned time horizon given the cost challenges facing the automotive industry amid the substantial financial outlays projected to be incurred by the Company in pursuit of its strategic objectives.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered that the E factor related to carbon and greenhouse gas costs represents a relevant negative factor as VW, consistent with its automotive peers, is facing a fundamental transformation process in line with the implementation of ever more stringent emission and fuel consumption regulations across several jurisdictions. Accordingly, the Company is undergoing substantial investments associated with the electrification of its model portfolio, including the further development of modular toolkits for its volume, premium, and sports brands. Similarly, VW is investing in the gradual conversion of its locations for the production of electric vehicles and in the creation of battery manufacturing capacity with the aim of establishing a battery supply chain under its own control.

Social (S) Factors
DBRS Morningstar considered that the S factor related to product governance represents a relevant negative factor in connection with VW’s diesel issue, which dates back to 2015 and initially spanned 482,000 vehicles in the United States, only to quickly increase to 11 million units globally.

Governance (G) Factors
DBRS Morningstar considered that the G factor related to corporate/transaction governance, specifically regarding VW’s shareholder structure and distribution of voting rights, represents a relevant negative factor. As of YE2022, Porsche Automobil Holding SE, Stuttgart held 53.3% of the voting rights. The State of Lower Saxony (the second-largest shareholder) held 20.0% of the voting rights, with Qatar Holding LLC holding 17.0% of the voting rights. Accordingly, external shareholders have very few voting rights; these amounted to 9.7% as of YE2022. Similarly, VW’s supervisory board is composed primarily of shareholders and worker representatives, with only a nominal proportion of independent members; this potentially limits the board’s ability to oversee risks.

The combination of the ESG factors cited above negatively affects the credit ratings.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Notes:
All figures are in euros unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023; https://www.dbrsmorningstar.com/research/411694)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

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 [email protected].

The credit rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the credit rating process for this credit rating action.

DBRS Morningstar did not have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is an unsolicited credit rating.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

This credit rating concerns a newly rated issuer. This is the first DBRS Morningstar credit rating on this issuer.

With respect to the Financial Conduct Authority (FCA) and European Securities and Markets Authority (ESMA) regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the ESMA in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the FCA in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Credit Rating Committee Chair: Timothy O’Brien, Managing Director, Diversified Industries
Initial Credit Rating Dates:
VW – May 16, 2001
VWIF – December 27, 2023

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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