Primary Credit Analyst: Alex P Herbert, London (44) ; alex.herbert@standardandpoors.com

Transcription

1 Summary: Volkswagen AG 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 Initial Analytical Outcome ("Anchor") And Rating Result Rationale Outlook Standard & Poor's Base-Case Scenario Business Risk Financial Risk Liquidity Other Modifiers Ratings Score Snapshot Related Criteria And Research APRIL 16,

2 Summary: Volkswagen AG Corporate Credit Rating A-/Positive/A-2 Profile Assessments BUSINESS RISK STRONG Vulnerable Excellent FINANCIAL RISK MODEST Highly leveraged Minimal Initial Analytical Outcome ("Anchor") And Rating Result Our 'A-' rating on Germany-based automaker Volkswagen AG (VW) is derived from: Our anchor of 'a', based on our "strong" business risk and "modest" financial risk profile assessments for the company. We apply a one-notch downward adjustment for our "comparable ratings analysis," reflecting our view that VW's leverage metrics are toward the weaker end of the range we consider commensurate with a "modest" financial risk profile. Rationale Business Risk: Strong Leading market positions in passenger cars and trucks. High contribution to earnings from well-known premium and luxury brands and from joint ventures in China, through dividends. Broad product and geographic diversity. Investments support modernization and the extension of the product range over the medium term. Improving business conditions in core European market in Significant portion of vehicle sales come from volume segments. Cyclical automotive demand. Financial Risk: Modest Significant operating cash flow to cover material levels of capital expenditure. Further expansion supported by potential acquisitions, including the offer for the remaining minority stake in Scania AB, which is expected to close this month. Strong liquidity. APRIL 16,

3 Outlook: Positive The positive outlook reflects a possibility that we could raise the rating by one-notch to 'A'. This could occur if we felt that VW could sustainably improve its profitability and leverage metrics. We expect to review the outlook this year, as we revised the outlook to positive in August Upside scenario We could raise the ratings by one notch if we envisage that VW will sustainably improve its profitability and leverage metrics, including ratios of funds from operations (FFO) to Standard & Poor's adjusted debt close to 60% and adjusted debt to EBITDA below 1.5x. For 2014, we forecast stable credit metrics of adjusted FFO to debt of about 50%, and adjusted debt to EBITDA of about 1.4x. For 2015, we anticipate some improvements to FFO to debt of about 60%, and adjusted debt to EBITDA of about 1.0x-1.2x. These levels could be achieved due to stronger margins, without additional debt-financed acquisitions. In this scenario, we would probably remove the current one-notch negative adjustment for our comparable ratings analysis, as these metrics would be consistent with the stronger end of the range of the existing "modest" financial risk profile category. Downside scenario We could revise the outlook to stable if we determined that VW's profitability or leverage was not likely to strengthen above 2013 levels. This could occur for example, if the recovery in market demand did not continue, or if VW undertook further debt-financed acquisitions. Standard & Poor's Base-Case Scenario APRIL 16,

4 Assumptions We project 1.0% GDP growth for the eurozone in 2014, with stronger growth in the U.S. of 3.0% and in Asia-Pacific of 5.4%. We forecast a low-single-digit increase in revenues in each of 2014 and 2015, reflecting higher deliveries in key markets, with faster growth in Asia than in Western Europe, which has more sluggish but improving market conditions. For 2014, we factor in a reported stable consolidated operating margin of 6%, reflecting ongoing competitive markets, with a slight improvement in 2015 to 6.0%-6.5%, supported by cost improvements. Also for 2014, we forecast capital expenditures (capex) of 15 billion- 16 billion (including capitalized development costs), and dividend payments of around 2.0 billion. We assume 6.7 billion of spending on acquisitions, reflecting the announced conditional cash offer for the remaining stake in Scania. Our base case does not incorporate any other meaningful acquisition-related outflows for 2014, and includes only limited spending in Key Metrics 2013A 2014E 2015E Reported operating margin 5.9% 6.0% 6.0%-6.5% FFO to debt* 49% c.50% c.60% Debt to EBITDA* 1.5x c.1.4x 1.0x-1.2x *Fully Standard & Poor's-adjusted. A--Actual. E--Estimate. Business Risk: Strong Our assessment of VW's business risk profile is supported by the group's leading market positions in passenger cars and trucks, with broad product and geographic diversity in Europe, Americas and Asia. The group has well-known brands covering volume, premium, and luxury segments. In addition, we expect the company's spending on modernizing and extending its product range to support the business over the next few years. These strengths are partly offset by the group's significant exposure to generally cyclical demand, high capital intensity and price competition in end-markets. This includes the low-margin volume segment, which accounts for a significant portion of VW's vehicle sales. In 2013, VW's reported consolidated operating profit margin was flat year-on-year at about 6%. In the automotive division, operating profits were lower in VW passenger cars, Audi and MAN, but offset by a full year of profits from Porsche. For 2014, we anticipate slightly higher revenues due to VW's deliveries increasing at least in line with the 4% we forecast for the global car market. We also forecast a similar operating performance, with a reported consolidated operating profit margin of 6%, and an improved margin of 6.0%-6.5% in APRIL 16,

5 Under our criteria, a combination of "strong" business risk and "modest" financial risk profiles results in an anchor of 'a+' or 'a'. We use the lower anchor of 'a' for VW, reflecting the constraints to VW's business risk profile from the significant portion of vehicle sales it derives from the volume segment. Financial Risk: Modest Our assessment of VW's financial risk profile is supported by the group's moderate leverage, assisted by significant operating cash flow in its automotive division. However, the group has large capital expenditures, planned at about 84 billion during , and an appetite for continued growth, which may be partly achieved through further acquisitions. We consider VW as having considerable liquidity resources and a financial policy that maintains a balanced funding mix. During 2013, VW's leverage metrics were slightly weaker year-on-year, with adjusted FFO to debt of 49% (55% in 2012), and adjusted debt to EBITDA of 1.5x (1.4x in 2012). This mainly reflected reduced FFO of 15.1 billion and EBITDA of 20.1 billion, but the metrics remained within levels consistent with the current rating. At year-end 2013, adjusted debt was lower year-on-year at 30.8 billion, including significant analytical adjustments for captive finance operations ( 96.8 billion), surplus cash ( 21.7 billion), pensions ( 18.3 billion), and operating leases ( 3.8 billion). Adjusted operating cash flow of 17.0 billion covered capex of 11.0 billion, leaving 6.0 billion of free operating cash flow. For 2014, we forecast that the company will continue to generate positive free operating cash flow, although we recognize that capex will remain significant. We include in our forecasts the 6.7 billion cash cost for the stake in Scania, which is currently due to close later this month. We note that this has been partly financed by 3.0 billion of new hybrid debt issuance and an expected 2.0 billion of new equity. We assume no other debt-financed acquisitions for On this basis, we forecast stable credit metrics in 2014 of adjusted FFO to debt of about 50%, and adjusted debt to EBITDA of about 1.4x, anticipating improvements in 2015 to FFO to debt of about 60%, and adjusted debt to EBITDA of 1.0x-1.2x. Liquidity: Strong We view VW's liquidity as "strong" under our criteria. We estimate that the ratio of sources of liquidity to uses will remain above 1.5x in 2014 and above 1.0x over the next two years. Key sources of liquidity are VW's substantial cash balances and marketable securities, and sizable cash flow from operations. These more than cover sizable annual capital expenditures and dividends. On a group-wide basis, including the financial services operations, short-term debt as of Dec. 31, 2013, was 60.0 billion compared with cash of 23.2 billion, marketable securities of 8.5 billion, the abovementioned 5 billion undrawn revolving credit facility, and similar availability under bilateral committed lines. We believe that VW is able to access diverse funding sources, as demonstrated by its use of international medium-term note programs, commercial paper programs, and asset-backed securities, as well as resilient access to capital markets. APRIL 16,

6 As of Dec. 31, 2013, liquidity resources in the group's automotive division included: Principal Liquidity Sources Retained cash of 20.5 billion and marketable securities of 6.7 billion, less about 5 billion which we treat as unavailable for debt repayment. Undrawn 5.0 billion revolving credit facility, which matures in July We understand that there are no financial covenants or rating triggers in the documentation. Sizable cash flow from operations. New equity issuance of 2.0 billion in respect of the Scania acquisition. Principal Liquidity Uses Capex of 15 billion- 16 billion annually in 2014 and Acquisition of Scania stake for 6.7 billion. Annual dividend payments of around 2.0 billion. No short-term debt maturities in the automotive division. Other Modifiers We apply a one-notch downward adjustment for our "comparable ratings analysis," reflecting our view that VW's leverage metrics are toward the weaker end of the range for a "modest" financial risk profile. Ratings Score Snapshot Corporate Credit Rating: A-/Positive/A-2 Business risk: Strong Country risk: Intermediate Industry risk: Moderately high Competitive position: Excellent Financial risk: Modest Cash flow/leverage: Modest Anchor: a Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Strong (no impact) Financial policy: Neutral (no impact) Management and governance: Satisfactory (no impact) APRIL 16,

7 Comparable rating analysis: Negative (- 1 notch) Related Criteria And Research Corporate Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Jan. 2, 2014 Key Credit Factors For The Auto And Commercial Vehicle Manufacturing Industry, Nov. 19, 2013 Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, Corporate Criteria: Rating Each Issue, April 15, 2008 Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com APRIL 16,

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