DBRS Morningstar Upgrades Rating of Volkswagen AG to A (low) from BBB (high); Trend Now Stable

DBRS Limited (DBRS Morningstar) upgraded the Issuer Rating of Volkswagen AG (VW or the Company) to A (low) from BBB (high). Concurrently, DBRS Morningstar upgraded VW Credit Canada, Inc.’s Senior Unsecured Debt rating and its Commercial Paper rating to A (low) and R-1 (low), respectively, from BBB (high) and R-2 (high), respectively. DBRS Morningstar also changed the trend on all ratings to Stable from Positive. The ratings incorporate VW’s solid business risk assessment as an automotive original equipment manufacturer of substantial scale with a highly diversified brand portfolio. Moreover, the ratings upgrades recognize VW’s ongoing solid operating performance despite sizeable challenges and cash outflows stemming from its diesel issue (the Diesel Issue), which, approximately four years following its initial onset, appears to have been largely addressed by the Company, although there remain numerous outstanding (primarily civil) actions across various jurisdictions. Notwithstanding the upgrade, DBRS Morningstar notes that VW’s corporate governance assessment continues to adversely affect the Company’s ratings.

DBRS Morningstar notes that VW has proven resilient to the Diesel Issue, with the Company’s global sales performance in 2018 and through the first half of 2019 (H1 2019) continuing to moderately outpace that of the overall industry. Financial performance over this period has also remained solid, with VW’s Automotive business generating sound operating margins of 7.1% and 7.0% (trailing 12-month periods; both figures as calculated by DBRS Morningstar) in 2018 and H1 2019, respectively. DBRS Morningstar observes further that Company’s relative performance in H1 2019 has readily exceeded that of many of its immediate peers that have reported markedly weaker earnings this year in line with declining sales volumes, higher raw material costs and increasing investment requirements. Finally, VW’s performance in China (accounted for using the equity method and thus not included in the above-cited operating-margin figures) has also remained robust, notwithstanding the ongoing contraction of the Chinese market.

DBRS Morningstar recognizes that VW, like all of its automotive peers, will face meaningful industry headwinds over the next several years amid moderating global sales growth and sizeable investment requirements, in line with the increasing electrification of its product portfolio (to meet tightening environmental regulations, notably in Europe and China). The Company is also targeting additional investments into new mobility businesses. (Regarding the Diesel Issue, while associated cash outflows will persist, these are anticipated to be of a substantially lesser magnitude going forward.) However, DBRS Morningstar estimates that VW’s liquidity position will remain robust amid such headwinds given its consistent free cash flow generation. DBRS Morningstar notes further that the Company maintains several additional options to further bolster its liquidity position, including the sale of further equity stakes of its Truck and Bus business, Traton SE, and other potential divestitures of non-core assets.

Consistent with the Stable trend, the ratings are expected to remain constant over the near to medium term. DBRS Morningstar notes that VW’s financial risk assessment provides some cushion against unexpected challenges at the current ratings levels. Conversely, additional rating upgrades are not anticipated over the similar time horizon given the slowing growth prospects and cost headwinds facing the industry, with the Company’s corporate governance issues also serving to constrain further positive rating actions.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2018), DBRS Criteria: Guarantees and Other Forms of Support (January 2019), DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers (March 2019), and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on dbrs.com under Methodologies & Criteria.

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.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union. The following additional regulatory disclosures apply to endorsed ratings:

Each of the principal methodologies employed in the analysis addressed one or more particular risks or aspects of the rating and were factored into the rating decision. Specifically, DBRS Morningstar used Rating Companies in the Automotive Manufacturing and Supplier Industries as the primary rating methodology in determining the rating of parent company Volkswagen AG. Subsequently, DBRS Criteria: Guarantees and other Forms of Support was applied in determining the ratings of VW Credit Canada Inc, which benefit from a Guarantee of Volkswagen AG. The Guarantee, in combination with DBRS Morningstar’s assessment of additional implicit support considerations, including (but not limited to) business, reputational and financial factors that are deemed likely to motivate a parent or affiliated company to support its subsidiary issuer, result in a flow through of VW AG’s rating to VW Credit Canada Inc. DBRS Criteria: Commercial Paper Liquidity Support for Non-Bank Issuers was applied to ensure that the provided liquidity in support of the Commercial Paper rating of VW Credit Canada Inc. was consistent with DBRS Morningstar criteria. Finally, DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers was applied to determine the equity treatment of various hybrid notes issued by Volkswagen AG.

The last rating action took place on October 25, 2018, when the trend on Volkswagen AG’s ratings was changed to Positive from Stable.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Lead Analyst: Robert Streda, Senior Vice President, Autos, Global Corporates
Rating Committee Chair: Tom Currie, Managing Director, Canadian Credit Practices
Initial Rating Dates: Volkswagen AG – May 16, 2001; VW Credit Canada Inc. – April 24, 2000

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

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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