VW’s 2017 credit profile shaky over dieselgate

Moody’s Investors Service said in a recently published report that uncertainties about the potential impact on Volkswagen 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. While the rating agency does not currently consider any of the scenarios to be the expected outcome, it believes the downside scenario is the most unlikely situation.

“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,” says Yasmina Serghini-Douvin, a Moody’s Analyst and author of the report.

In its upside scenario, Moody’s assumes that (1) VW is able to implement an effective technical solution; (2) the €6.5 billion it has provisioned is sufficient to cover costs associated with the resolution of its emission crisis; and (3) it will pay €2 billion in litigation costs. The resulting cash impact, net of offsetting measures, is €9.5 billion.

Under this scenario, VW’s leverage, interest coverage and free cash flow coverage ratios (with Moody’s adjustments) 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 (1) VW will be able to implement effective technical solutions; (2) it will incur €7.5 billion in total remediation costs; and (3) it will pay €4 billion in litigation costs. The resulting cash impact, net of offsetting measures, would total €20.5 billion through 2017. Under this scenario, VW’s credit metrics (with Moody’s adjustments) would gradually return to or close to their pre-emissions crisis by 2017.

In Moody’s downside scenario, under which VW (1) has no economically and technically viable solution and is forced to repurchase all 482,500 affected vehicles in the US; and (2) incurs significant litigation costs of €10 billion, the adverse cash impact could total €31 billion over the 2015-17 period.