Volkswagen AG Ratings Affirmed At 'BBB+/A-2'; Off UCO On Updated Captive Finance Criteria; Outlook Negative

Transcription

1 Research Update: Volkswagen AG Ratings Affirmed At '/A-2'; Off UCO On Updated Captive Finance Criteria; Outlook Negative Primary Credit Analyst: Alex P Herbert, London (44) ; alex.herbert@standardandpoors.com Secondary Contact: Eric Tanguy, Paris (33) ; eric.tanguy@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List DECEMBER 18,

2 Research Update: Volkswagen AG Ratings Affirmed At '/A-2'; Off UCO On Updated Captive Finance Criteria; Outlook Negative Overview Standard & Poor's Ratings Services published its updated criteria for assessing how captive finance operations affect the creditworthiness of a nonfinancial corporate issuer on Dec. 14, We are affirming our '/A-2' corporate credit ratings on German-based automotive manufacturer Volkswagen AG. The outlook remains negative. At the same time, we have removed from the ratings the under criteria observation (UCO) identifier we applied on Dec. 14, Rating Action On Dec. 18, 2015, Standard & Poor's Ratings Services affirmed its '/A-2' long- and short-term corporate credit ratings on German-based automotive manufacturer Volkswagen AG (VW), and affirmed all ratings on the group's debt. The outlook remains negative. At the same time, we have removed from the ratings on the parent and relevant group entities the under criteria observation (UCO) identifier we applied on Dec. 14, Rationale This affirmation follows our publication of updated criteria for assessing how captive finance operations affect the creditworthiness of a nonfinancial corporate issuer on Dec. 14, 2015 (see "The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers"). VW has substantial financial services activities, which are a central part of the group's business model and support the sale and leasing of VW's vehicles. Importantly, in this analysis we are referring only to VW's consolidated financial services division, which we regard as the group's captive finance activity. We do not analyze or refer to any financial service legal entity or group such as Volkswagen Financial Services AG or Volkswagen Bank GmbH, which are subject to separate criteria. On Sept. 30, 2015, VW had 8.1 million financing and leasing contracts in place. The group had captive finance receivables and operating lease assets of billion for the financial services division. We regard the asset quality of DECEMBER 18,

3 the billion of finance receivables (which are primarily vehicle-financing term loans) to be excellent, based on annual net losses being less than 1% in recent years. (In this context only, we note the 0.4% credit loss ratio of the main operating entity in the financial services division for 2014.) Lease assets of 31.0 billion for the group expose the parent to the risk of residual value (RV) losses. These arise when proceeds from the sale of the assets at the end of the lease period are lower than expected. These risks are managed as part of VW's risk management framework. VW does not generally disclose figures for RV losses, so we do not include them in our net loss ratio figure. Such losses are naturally unpredictable and can be significant during periods of stress, thereby potentially weakening the overall creditworthiness of the group. For VW, lease assets comprise a relatively small share (22%) of the group's total captive finance-related assets. To finance these captive assets, VW has incurred significant debt obligations. These stood at billion on Sept. 30, Leverage in the captive finance operations (that is, reported debt to equity) was 6.9x on Sept. 30, 2015, and we expect it to remain below 12x. VW's captive finance operations rely heavily on short-term financial liabilities, which stood at 70.2 billion on Sept. 30, 2015 (We note this figure is slightly lower on a group consolidated bases at 65.7 billion). We see this as a relative concentration in terms of liability duration, but consider it to be broadly matched to short-term finance receivables and other short-term assets. In our analytical adjustments, we now exclude the reported debt of the financial services division from the reported group debt, in order to calculate our adjusted debt figure. On this basis, Standard & Poor's-adjusted debt has been recalculated lower than previously, at 24.9 billion as on Dec. 31, 2014 (compared to 37.5 billion) and 18.5 billion on Sept. 30, 2015 (compared to 31.5 billion). On this basis, VW's ratios of funds from operations (FFO) to adjusted debt and debt to EBITDA for the 12 months ended Sept. 30, 2015 are somewhat higher at 68% and 1.1x, respectively, compared to 40% and 1.8x previously. Accordingly, while our base-case scenario assumptions are unchanged, we have updated our leverage forecasts for 2015 and 2016, which are now slightly stronger, as follows: 2015: Adjusted debt to EBITDA of about 1.7x and FFO to adjusted debt of about 50% (compared to 2.1x and 35%-40% previously). 2016: Adjusted debt to EBITDA of about 1.4x and FFO to adjusted debt of about 55% (compared to 1.7x and FFO to adjusted debt of 45%-50% previously). The '' long-term corporate credit rating is unchanged. It continues to reflect the satisfactory business and modest financial risk profiles, from DECEMBER 18,

4 which we derive an anchor, representing the initial analytical assessment of VW's creditworthiness of 'bbb+'. We have assessed the captive finance modifier as neutral, meaning that it has no current impact on the rating. Outlook The negative outlook indicates the possibility that we may lower the long-term corporate credit rating on VW by one notch within the next one-to-two years. Downside scenario A downgrade could occur if we expect leverage metrics to weaken in 2016 on a sustainable basis, with adjusted FFO to debt below 45% or adjusted debt to EBITDA above 2x. This could occur if VW incurs substantial fines or litigation damages without taking sufficient offsetting measures, or if operating performance and cash flow generation were more negatively affected by VW's emissions challenges than we expect. Upside scenario We could revise the outlook to stable if the negative effects of the emissions challenges were more moderate than expected, and if we expected VW to sustainably demonstrate adjusted FFO to debt above 45% or adjusted debt to EBITDA below 2x. Ratings Score Snapshot Corporate Credit Rating: /Negative/A-2 Business risk: Satisfactory Country risk: Intermediate Industry risk: Moderately high Competitive position: Strong Financial risk: Modest Cash flow/leverage: Modest Anchor: bbb+ Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Fair (no impact) Captive finance: Neutral (no impact) Comparable rating analysis: Neutral (no impact) DECEMBER 18,

5 Related Criteria And Research Related Criteria The Impact Of Captive Finance Operations On Nonfinancial Corporate Issuers, Dec. 14, 2015 Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Standard & Poor's National And Regional Scale Mapping Tables, Sept. 30, 2014 National And Regional Scale Credit Ratings, Sept. 22, 2014 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 Key Credit Factors For The Auto And Commercial Vehicle Manufacturing Industry, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Assigning Equity Content To Corporate Entity And North American Insurance Holding Company Hybrid Capital Instruments, April 1, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Banks: Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Methodology For Mapping Short- And Long-Term Issuer Credit Ratings For Banks, May 4, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, Corporate Criteria: Rating Each Issue, April 15, 2008 Related Research German Automaker Volkswagen Downgraded To '' from 'A-' On Adverse Emissions Impacts; Outlook Negative, Dec. 1, 2015 Industry Report Card: The Global Automotive Industry Faces Mounting Uncertainties, Oct. 13, 2015 Ratings List Ratings Affirmed Volkswagen AG Volkswagen Group Services S.A. Corporate Credit Rating Banco Volkswagen S.A. Brazil National Scale /Negative/A-2 braa+/negative/-- DECEMBER 18,

6 LeasePlan Corporation N.V. Volkswagen Bank GmbH Volkswagen Financial Services AG Volkswagen Finans Sverige AB Nordic Regional Scale Volkswagen Insurance Co. Ltd. Corporate Credit Rating Financial Strength Rating BBB/Watch Neg/A-2 A-/Negative/A-2 /Negative/A-2 --/--/K-1 /Negative/-- /Negative/-- Volkswagen AG VW Credit Inc. Volkswagen Financial Services AG Volkswagen Financial Services Japan Ltd. Volkswagen Financial Services N.V. Volkswagen Group of America Finance LLC Volkswagen Leasing GmbH Commercial Paper A-2 LeasePlan Australia Ltd. LeasePlan Corporation N.V. Senior Unsecured Commercial Paper LeasePlan Finance N.V. (Dublin Branch) LeasePlan New Zealand Ltd. Commercial Paper BBB/Watch Neg A-2/Watch Neg A-2/Watch Neg VW Credit Canada Inc. Commercial Paper [1] A-1(LOW) Commercial Paper [1] A-2 Volkswagen Bank GmbH Senior Unsecured A- Commercial Paper A-2 Volkswagen Bank RUS Senior Unsecured BB+ Volkswagen Canada Inc. DECEMBER 18,

7 Commercial Paper [1] A-1(LOW) Commercial Paper [1] A-2 Volkswagen Financial Services Australia Pty Ltd. Volkswagen International Luxemburg S.A. Volkswagen Finans Sverige AB Volkswagen Group Services S.A. Volkswagen Financial Services (UK) Ltd. Skofin s.r.o. Commercial Paper A-2 Volkswagen International Finance N.V. cna+ Junior Subordinated [1] BBB- Commercial Paper [1] A-2 Scania AB (publ.) Corporate Credit Rating Nordic Regional Scale South Africa National Scale /Negative/A-2 --/--/K-1 zaaaa/--/zaa-1 Scania CV AB Senior Unsecured [2] Commercial Paper [2] K-1 [1] Guaranteed by Volkswagen AG. [2] Guaranteed by Scania AB (publ.). N.B.--List does not include all ratings affected. Additional Contact: Industrial Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) DECEMBER 18,

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