Moody’s drops Volkswagen view to negative

Moody's Investors Service said it changed the outlook on the ratings of Volkswagen AG and its guaranteed rated subsidiaries to negative from stable.

Concurrently the agency affirmed the A2/provisional A2 long-term senior unsecured ratings and Prime-1/provisional Prime-1 commercial paper and other short-term ratings assigned to the company and its guaranteed rated subsidiaries. It also affirmed the Baa1 junior subordinate rating assigned to the undated euro-denominated subordinated notes issued by Volkswagen International Finance NV and guaranteed by Volkswagen.

Moody’s said the outlook change follows Volkswagen's announcement that the U.S. Environmental Protection Agency (EPA) is investigating the company's compliance with the U.S. Clean Air Act (CAA). In its notice of violation, the EPA said that Volkswagen produced and installed “defeat devices” in certain of its 2.0 litre diesel engine vehicles which render inoperative elements of their emission control system designed to comply with CAA standards.

The action reflects the agency’s belief that Volkswagen has the financial wherewithal to cover the amount of the announced provision (€6.5 billion), although fully funding that provision would severely limit flexibility at the A2 rating level.

Moody's concern, however, is that Volkswagen's alleged breach of U.S. environment rules and, especially, the process by which that breach occurred, will have an adverse effect on its reputation and credibility within the global passenger car markets. This could be a long lasting image, which would weaken Volkswagen's market position, brand equity and pricing perception by customers. This could ultimately affect Volkswagen's future earnings and cash flow generation, the agency said.

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