Moody’s Investors Service has said in a report that uncertainties about the potential impact on Volkswagen Group’s reputation, earnings and cash flows from its emissions crisis could potentially weigh on the company’s credit profile into 2017.
In its report, Moody’s outlines three possible outcomes from the VW emissions crisis and their estimated impact on several of the key financial ratios that could affect its credit profile. None of the scenarios are currently listed as the expected outcome, but Moody’s has said the downside scenario is the least likely situation.
Both Scania and MAN are part of VW group.
Yasmina Serghini-Douvin, a Moody’s Analyst and author of the report, said: “While revisions to its financial policies and additional cost-cutting could cushion the impact of the emissions crisis on VW’s liquidity and credit metrics, it may take several quarters, if not years, before the magnitude of the potential impact on the company’s reputation, earnings and cash flows becomes clear.”
In its upside scenario, Moody’s assumes that VW is able to implement an effective technical solution, the €6.5bn it has provisioned is sufficient to cover costs associated with the resolution of its emission crisis and it will pay €2bn in litigation costs. The resulting cash impact, net of offsetting measures, is €9.5bn. Under this scenario, VW’s leverage, interest coverage and free cash flow coverage ratios would deteriorate, though they would be in line with Moody’s expectations for the rating as early as 2016.
Under Moody’s mid-range scenario, the rating agency assumes that VW will be able to implement effective technical solutions, it will incur €7.5bn in total remediation costs; and it will pay €4bn in litigation costs. The resulting cash impact, net of offsetting measures, would total €20.5bn through 2017. Under this scenario, VW’s credit metrics would gradually return to or close to their pre-emissions crisis by 2017.
In Moody’s downside scenario, under which VW has no economically and technically viable solution and is forced to repurchase all 482,500 affected vehicles in the US and incurs significant litigation costs of €10bn, the adverse cash impact could total €31bn over the 2015-17 period. Under this scenario, VW’s leverage, interest coverage and free cash flow coverage ratios would weaken significantly through to 2017, moving below their current levels and/or the threshold the rating agency set for the A2 rating.
VW’s current A2 rating is consistent with its financial ratios staying within the range for that level and the company’s strong liquidity position. However, Moody’s negative outlook considers that events could evolve in a way that is worse than the rating agency currently views as being most likely and result in a downgrade, potentially by more than one notch.
