- S&P downgrades Volkswagen to A- from A
- VW bonds could be stripped of Investment Grade status
- Moody's maintains Abengoa rating, adds negative outlook
Road to ruin: The ongoing scandal surrounding Volkswagen's emissions
now threatens the firm's credit rating. Photo: iStock
By Michael Boye
As the recent sentiment-driven rally has cooled ahead of the Q3 earnings season, the first major rating agency has finally made a move on Volkswagen in the wake of the emissions scandal. Markets, which as always are trying to stay ahead of the curve, are already anticipating more ratings-related action for the beleagured carmaker.
The global rating agency S&P downgraded the credit rating of the German carmaker by one notch (to A- from A) this week while the company's subordinated bonds, including perpetual bonds, were also downgraded one notch to BBB from their previous BBB+ rating.
Furthermore, the credit rating agency warned it could downgrade credit ratings by another two notches which would then potentially strip the subordinated perpetual bonds of their Investment Grade status.
This decision is going to depend on the financial sanctions levied against VW, the extent of lawsuits, and the possible negative sales impact. The company, of course will fight to maintain its solid credit rating and has several options on its hands including cost cuts, lower capex, share capital issuance, asset disposal, or the suspension of dividend payments.
The pricing of Volkswagen's perpetual bonds already discounts several downgrades and currently trades at par with similar BB- issues. Barring further setbacks or forced selling by institutions in the event of a downgrade below Investment Grade, the current price level thus seems to reflect an elevated level of pessimism.
The perpetual bond with its first redemption option in 2026 is currently trading at an ask price of 89.00 with a yield of 6.1%.
Volkswagen perpetual bonds have sold off further on the rating action,
even as several moves more are already priced in. Source: Bloomberg
The other major rating agency, Moody's, has not yet formally downgraded the company, but seems to have been busy evaluating another in-focus bond issuer – namely troubled Spanish energy company Abengoa.
After this weekend's extraordinary general meeting at which the previously announced corporate governance changes and capital plan were formally approved, Moody's has chosen to maintain its Ba3 rating, albeit with a negative outlook.
There is still considerable uncertainty about the company's future and a debt restructuring still can’t be ruled out until sufficient capital has been raised and assets have been sold off.
The market is notably more pessimistic, highlighting the inherent trust issues the market has with the company, and is currently trading the 2021 bond at a price of around 52 with a yield of 21%.
— Edited by Michael McKenna
Michael Boye is a fixed income trader at Saxo Bank