TEXT-S&P revises Volkswagen outlook to positive from stable
(The following statement was released by the rating agency)
August 27 - German automaker Volkswagen's (VW) credit ratios appear strong enough to accommodate the recently announced Porsche acquisition.
-- Porsche will add to VW's business diversity and, over time, reinforce the contribution of the premium/luxury segments to the automaker's earnings.
-- We are revising our outlook on VW to positive from stable and affirming the 'A-/A-2' ratings.
-- The positive outlook reflects the possibility that we may raise the rating in the coming two years if VW's profit measures remain strong in the face of more challenging macroeconomic conditions and if credit ratios remain at the higher end of the "modest" category despite high capital expenditures. Rating Action On Aug. 27, 2012, Standard & Poor's Ratings Services revised its outlook on German automaker Volkswagen AG (VW) to positive from stable. At the same time, we affirmed our long- and short-term corporate credit ratings at 'A-/A-2'. As a result, we affirmed our 'A-/A-2' long- and short-term counterparty credit ratings on VW's captive finance arms, Volkswagen Financial Services AG (VW FS) and its subsidiary, Volkswagen Bank GmbH, and revised the outlooks to positive from stable. VW FS' core subsidiary Volkswagen Finans Sverige AB is unaffected by the rating action and we have affirmed its 'K-1' nordic regional scale short-term rating. Rationale The outlook revision reflects the possibility that we may raise VW's rating over the coming two years if the group's profit measures remain strong in the face of more challenging macroeconomic conditions and if credit ratios remain at the higher end of the "modest" category despite high capital expenditures. The ratings on VW reflect its "strong" business risk profile and "modest" financial risk profile, according to our criteria. We assess VW's business risk profile as "strong," based on its leading market positions in passenger cars and trucks in Europe and emerging markets, its broad brand portfolio that includes a sizable luxury car product suite, and positive contribution from its financial services operation. Our assessment also takes into account the acquisition by VW of the remaining indirect 50.1% stake in Dr. Ing. h.c.F Porsche AG (Porsche AG; not rated) during the second half of 2012; the group's recent gains in market shares in several large countries--for instance, China, the U.S., and Russia--and a resilient performance across Europe and in Brazil; and the gradual introduction of the group's modular transversal toolkit strategy (named MQB) for a wider range of vehicles. These strengths are offset by our view of VW's exposure to the oversupplied, highly cyclical, capital intensive, very competitive, and low-profit volume segment of the automotive industry and VW's exposure to the currently depressed European car market. In our base-case scenario, we anticipate that the remainder of 2012 will prove sluggish in terms of car sales in Europe--the region represented 47.5% of VW's deliveries during first-half 2012. But we think that growing penetration in Asia-Pacific, North America, and several other emerging markets, as well as a positive mix effect, should help VW to increase its revenues, like for like, by a few percentage points for 2012. We expect first-time consolidation of Porsche AG effective from Aug. 1, 2012, to have a limited impact on annual earnings as a consequence of one-off purchase price allocation charges. In this context, we think VW will be able to maintain operating profit for the full-year around the same level as in 2011 (EUR11.3 billion), with the group EBIT margin being around 6%. We expect operating margin to improve marginally in 2013, thanks to VW's continued disciplined cost management and process optimization. VW's consolidated EBIT margin averaged 6.8% for the first six months of 2012 and the core automotive division still reported a 6.6% EBIT margin. VW's public guidance includes an 8% consolidated profit before tax margin target as part of its "strategy 2018" plan. We believe that VW's acquisition of the remaining stake in Porsche, coming on the heels of the Ducati and MAN transactions, will have a slightly depressing impact on credit ratios for the enlarged group. On top of the EUR4.5 billion acquisition outflow, year-end ratios are likely to be dampened by full consolidation of Porsche's debt at year-end 2012 while only a few months of its operations are consolidated. However, we expect the impact to be compatible with our rating assessment. Since 2009, we have adjusted VW's credit metrics for Porsche's financial debt and pensions and foreseeable cash outflows relating to the integration process. At end-June 2012, in a still favorable overall environment, VW's credit ratios were fully coherent with its ratings. Including adjustments for Porsche, fully adjusted funds from operations (FFO) to debt stood at 70.5% by end-June 2012. Adjusted debt to EBITDA was 1.4x and free operating cash flow (FOCF) to debt 15.8%. We consider that VW's ratings are supported by a "modest" financial risk profile, reflecting the group's conservative funding and dividend policy, moderate debt leverage, and strong liquidity position. Weighing on the financial profile is our view that VW has a strong appetite to expand to become the world's most successful car manufacturer as part of its strategy 2018 plan. Liquidity The short-term rating on VW is 'A-2'. We view the group's liquidity and financial flexibility as "strong," according to our criteria, with liquidity sources in the group's automotive division exceeding funding needs by more than 1.5x for the next 24 months. As of June 30, 2012, liquidity resources in the group's automotive division included:
-- Cash of about EUR17.35 billion, of which we consider about EUR4 billion is necessary for ongoing operations;
-- Marketable securities of about EUR5.5 billion; and
-- An undrawn EUR5 billion five-year multicurrency revolving credit facility that can be used by both the industrial and financial service companies of the group, and matures in July 2017. By contrast, VW had no industrial short-term debt, maturing within a year, as of June 30, 2012. Even deducting the long-term financial liabilities of the industrial side, VW had a net liquidity position of EUR7.7 billion as of June 30, 2012. We understand that VW's financial agreements do not contain any covenants or rating triggers that could cause a sudden liquidity shortage. Marketable securities of about EUR5.5 billion at end-June 2012 also add to the automotive division's financial flexibility. On a group-wide basis including the financial services operations, 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 throughout the 2009 downturn. On a group basis, short-term debt as of June 30, 2012, was EUR52.0 billion compared with cash of EUR20.3 billion, a EUR5 billion undrawn syndicated committed facility, and similar availability under bilateral committed lines. Marketable securities of about EUR6.8 billion at end-June 2012 also boosted the group's financial flexibility. VW's liquidity is further supported by our expectation that the group should generate positive discretionary cash flow in 2012 ahead of the hefty acquisitions laid down for the year. Outlook The positive outlook reflects our opinion that VW may be able to maintain credit ratios that we would consider as commensurate with a 'A' rating, such as adjusted FFO to debt close to 60% and debt to EBITDA below 1.5x, even under a conservative credit scenario. In our base-case scenario for 2012 and 2013, we expect VW's credit ratios to slightly outperform those levels. An upgrade would most likely require VW to sustain operating margin above 6%, including through periods of soft demand, and to continue reducing its dependence on the European market. When deciding on a future upgrade, Standard & Poor's will also review several other factors that could affect VW's credit quality: Future acquisition risk, particularly with respect to VW's truck business, improvement in profitability measures achieved by VW for its currently lackluster Seat and north American operations, the company's somewhat complex corporate governance, and any material pending litigation. We see the need for groups like VW, operating in a cyclical industry, to maintain solid credit ratios to be able to withstand large swings in demand and operating cash flow, as has been the case in the recent past, and face up to capital expenditure needs and new operational challenges. VW's vision to become world's largest car manufacturer by 2018 implies the risk, in our view, that it may incur large capital spending or acquisitions. We consider the group's headroom to accommodate further debt-financed acquisitions as limited at the current rating level. We could return the outlook to stable if VW's operating performance weakens markedly, resulting in FFO to debt below 50%. This could happen, for instance, if the operating margin contracts by some 200 basis points versus the recent level or if the group fails to maintain positive FOCF in its automotive division for some time. Related Criteria And Research
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011 Ratings List Ratings Affirmed; Outlook Action
To From Volkswagen AG Volkswagen Group Services S.A. Corporate Credit Rating A-/Positive/A-2 A-/Stable/A-2 Volkswagen Bank GmbH Volkswagen Financial Services AG Counterparty Credit Rating A-/Positive/A-2 A-/Stable/A-2 Rating Affirmed Volkswagen Finans Sverige AB Counterparty Credit Rating Nordic Rating Scale K-1 (Reporting By Hilary Russ)
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