DBRS Morningstar Confirms Volkswagen AG at A (low), Negative; Removes Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Volkswagen AG (VW or the Company) at A (low). Concurrently, DBRS Morningstar confirmed the Senior Unsecured Debt and Commercial Paper ratings of VW Credit Canada Inc. at A (low) and R-1 (low), respectively.

Pursuant to the moderate scenario as outlined in the DBRS Morningstar commentary titled “Global Macroeconomic Scenarios: Application to Credit Ratings” (dated April 22, 2020, and subsequently updated on June 1, 2020, and July 22, 2020), DBRS Morningstar estimates that the Company’s financial risk assessment (FRA) will remain at levels commensurate with the existing ratings despite an anticipated softening of VW’s credit metrics given the global escalation of the Coronavirus Disease (COVID-19). The trend on all ratings is Negative, however, reflecting significant headwinds facing the automotive industry and uncertainty regarding the future progression of the coronavirus. With this rating action, VW’s ratings are removed from Under Review with Negative Implications, where they were placed on March 27, 2020.

DBRS Morningstar notes that prior to the coronavirus pandemic, the Company’s FRA was at solid levels (providing moderate cushion in the context of the current ratings) because of VW’s conservative financial policy and consistent operating performance in recent years despite sizeable challenges and cash outflows stemming from its diesel issue (now substantially addressed, notwithstanding outstanding (primarily civil) actions across various jurisdictions). As with other auto manufacturers, the coronavirus pandemic materially affected the Company’s operations globally, initially in China in January 2020 and subsequently across Europe and North America (as well as several other smaller jurisdictions) in March 2020. In line with the trajectory of the pandemic, VW’s financial results for the first half of 2020 (H1 2020) were correspondingly weaker (compared with the similar prior-year period) as the Company’s Automotive division reported revenues of EUR 77 billion (relative to venues of EUR 106 billion in H1 2019) and an operating loss of EUR 2.7 billion. While the second half of the year is projected to be bolstered by a recovery across most markets, DBRS Morningstar expects VW’s 2020 annual sales to decline by more than 20% compared with 2019 levels with operating earnings also being significantly affected, though anticipated to remain at positive levels. With respect to free cash flow generation, this will decrease correspondingly with lower earnings, exacerbated by negative working capital, although this has been meaningfully alleviated by disciplined inventory management with VW rapidly adapting production levels in response to the pandemic.

Consistent with its industrial peers, VW implemented several countermeasures in response to the coronavirus pandemic. From a financial perspective, these include significant reductions (in absolute terms) in both research and development as well as capital expenditures. The Company also recently announced that it has lowered its dividend proposal in response to the coronavirus pandemic, with aggregate dividend payments to approximate prior-year levels (despite higher earnings attained in 2019). To bolster its cash position, Volkswagen has drawn from its available credit lines. In June, the Company also successfully placed hybrid notes in a total amount of EUR 3 billion to further strengthen its capital base. As a function of the above, DBRS Morningstar deems the Company’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic.

Notwithstanding the substantially negative effects of the coronavirus pandemic on global automotive sales and production, DBRS Morningstar nonetheless notes that the ensuing sales recovery across major jurisdictions has thus far moderately exceeded its expectations. Significantly, industry sales in China (VW’s most important automotive market) reverted to year-over-year growth as of April 2020 following an extended decline of close to two years. DBRS Morningstar acknowledges that sizable headwinds associated with the coronavirus pandemic persist, notably in the U.S. where the pandemic shows no signs of abating across several states. DBRS Morningstar notes, however, that the Company’s exposure to the U.S. is well manageable. Moreover, as anticipated, sales of premium vehicles (where VW also has a strong presence) have thus far proven relatively resilient to the adverse effects of the pandemic.

Consistent with the Negative trend on the ratings and recognizing the ongoing uncertainty regarding the ultimate severity and duration of the coronavirus pandemic, DBRS Morningstar notes that a further progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) could result in additional downward rating pressures. Conversely, should the worst effects of the coronavirus pandemic be significantly contained through the first half of 2020 and followed by a meaningful recovery in the remainder of the year, the trend on the ratings could be changed to Stable.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in euros unless otherwise noted.

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019), DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020), DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020), DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019), and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

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@dbrsmorningstar.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, “Rating Companies in the Automotive Manufacturing and Supplier Industries” (October 28, 2019) was the primary rating methodology applied in determining the rating of parent company Volkswagen AG. Subsequently, “DBRS Morningstar Criteria: Guarantees and other Forms of Support” (January 22, 2020) 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 Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers” (March 10, 2020) 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. “DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers” (November 1, 2019) was applied to determine the equity treatment of various hybrid notes issued by Volkswagen AG. Finally, “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships” (November 25, 2019) was applied to assess the corporate structure of the Volkswagen group of companies.

The last rating action took place on March 27, 2020, when DBRS Morningstar placed the ratings of Volkswagen AG and VW Credit Canada Inc. Under Review with Negative Implications.

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

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, Diversified Industries
Rating Committee Chair: Charles Halam-Andres, Managing Director, Diversified Industries & Sports Finance
Initial Rating Dates: Volkswagen AG – May 16, 2001; VW Credit Canada Inc. – April 24, 2000

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

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-- Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019)
https://www.dbrsmorningstar.com/research/352181/rating-companies-in-the-automotive-manufacturing-and-supplier-industries
-- DBRS Morningstar Criteria: Guarantees and Other Forms of Support (January 22, 2020)
https://www.dbrsmorningstar.com/research/355780/dbrs-morningstar-criteria-guarantees-and-other-forms-of-support
-- DBRS Morningstar Criteria: Commercial Paper Liquidity Support for Nonbank Issuers (March 10, 2020)
https://www.dbrsmorningstar.com/research/357788/dbrs-morningstar-criteria-commercial-paper-liquidity-support-for-nonbank-issuers
-- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 1, 2019)
https://www.dbrsmorningstar.com/research/352346/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019)
https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships