Article / 14 October 2015 at 11:30 GMT

Weekly Bond Update: Rating agencies circle wounded VW

Fixed Income trader / Saxo Bank
  • 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

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CAPEX reduction must be the easiest path for VW to rapidly accrue savings. It is still easilly cash flow positive and has E21bn finance credit reserves. I notice it has announced that it will push R+D more down the electric car development and/or hybrid petrol+electric generation avenue (avoiding costly battery requirements) to prevent cross contanimation with negative views on its diesel fiasco. Also it is close to putting its commercial vans and haulage groups up for sale as the divestment of MAN lorry haulage and the commercial arm also raises E17bn and erases yet more exposure to diesel engines.


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