By on October 12, 2015

 

Standard & Poor’s downgraded Volkswagen’s rating on long-term debt Monday, and said the company’s diesel scandal indicates poor management. The financial agency further warned that its debt rating could be cut further if the automaker doesn’t immediately address the deepening scandal, Bloomberg reported (via Automotive News).

“VW has demonstrated material deficiencies in its management and governance and general risk-management framework,” Alex Herbert, a London-based analyst at S&P, said according to Bloomberg. “VW’s internal controls have been shown to be inadequate in preventing or identifying alleged illegal behavior.” Further damage and other violations “represents a significant reputational and financial risk.”

Volkswagen’s credit rating could severely impact how the automaker raises capital to help pay for its growing and deepening crisis that includes 11 million cars with a “defeat device” to cheat emissions.

Separately, German news agency Handelsblatt reported Monday that Volkswagen is asking its suppliers to cut their costs by €3 billion ($3.4 billion) to help the automaker save money to help pay for the scandal. The paper reported that the scandal could eventually cost Volkswagen €40 billion ($45 billion) after fines and fixes.

Volkswagen already said it would set aside in the third quarter €6.5 billion ($7.4 billion) to help pay for the scandal.

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12 Comments on “Volkswagen Debt Downgraded; Company Asking For Supplier Help...”


  • avatar
    WhiskeyRiver

    That sound you just heard coming from the skies overhead… Golden parachutes deploying simultaneously.

    Poor management, but I’ll be their contracts turn to gold on their way out.

  • avatar
    Lorenzo

    Aw, that’s Standard & Poor’s for you, late-jumping on the pig pile. Where was their expert assessment BEFORE the shingles hit the fan? These ratings agencies kind of remind me of the little pooch that circles around a dog fight, occasionally nipping at a leg that sticks out.

    One revelation was that Volkswagen was already found out and was negotiating with EPA and CARB last year. The “crisis” began when both agencies called out Volkswagen publicly. Maybe those agencies didn’t like the way the negotiations were going, and decided to publicly shame the company.

    I doubt the agencies realized how skittish the markets are and that VW stock would plunge, their bonds would be downgraded, and VW would then make a show of asking suppliers for help. All of that will be gradually reversed with a settlement.

    The uproar has given Volkswagen an out, having them claim severe harm, and eventually, an inability to pay any draconian fines. EPA and Carb made a stupid move, and Volkswagen made the most of the stock drop to counter the agencies’ demands.

  • avatar
    65corvair

    Oh, good, now their parts are going to be even less reliable.

    A company I worked for had the highest credit rating they could get for the size of company they were, up until the day they filed for bankruptcy. Yes, they should have figured out they had problems before all of this. It’s like taking your temperature after you go to the hospital.

  • avatar
    SCE to AUX

    The S&P downgrade seems like a Mr Obvious move.

    But asking your suppliers to shoulder billions in cost reductions? Optimizing cost is an ongoing business function, so this *extra special* request won’t be greeted warmly.

    Then again, perhaps $3.4 billion isn’t a lot, considering VW’s annual expenses on parts.

    It’s the $45 billion that catches my attention, which works out to an average of $4700 per affected car. I suppose repair parts, labor, buybacks, and fines really could amount to that much. Ouch!

    • 0 avatar
      Lorenzo

      The appeal to suppliers might just be a ruse to help Volkswagen claim poverty. By noting that they had been negotiating with EPA/CARB long before the regulators blew the whistle, Volkswagen can now place the blame on the American regulators for a clumsy and damaging negotiating tactic. That argument could find sympathetic ears in Europe, and possibly lead to much more lenient terms from European regulators, and undercut American demands as too draconian.

  • avatar
    Robert.Walter

    Given the production drops, of ca 20% (ca share of vw’s diesel sales in USA) if suppliers quoted to specific volumes, then these may in fact ask for price increases to cover their investment.

    For suppliers with thin margins and now order drops, such suppliers may be driven into the red or risk bankruptcy.

    VW finance is going to be exceptionally busy trying to oil squeaky supplier (and dealership) financial wheels with increasingly scarce capital (due to fines, sales drops, recall/repair actions, dealer suits, owner suits, etc.).

    VW’s situation has the opportunity to become a vicious cycle of demands to suppliers for cost reductions (weaken the supply base and weak suppliers are more inclined to cheat on quality) and on the product side deferred refreshment or content stripping (leads to less competitive vehicles, which need incentives to move, further decreasing profit margin); think of GM and Chrysler ca 2006-9.

    Unless there is proven to be a situation where everybody cheated like VW and the mess becomes so confusing that token billion dollar fines and a general attitude of let’s clean it all up and move forward develops, if VW is alone in this, or materially worse than average, then due to the crushing costs and fines soon to visit VW, I expect in the next 2 to 5 years, in addition to reduced product portfolios (itself requiring perilous platform deleveraging and consolidation) we will see Lamborghini and Ducati sold, Scania and MAN merged or sold, possibly Seat and Skoda merged or one of them being sold or closed.)

    Given that the skill sets necessary to expand a growing business with adequate capital over a long period of time are completely different from the skills necessary to restructure over a short period with capital shortages and disturbances in all directions, govt, supply, dealers, customers, shareholders, etc., chances are more likely than not that VW will need bankruptcy restructuring within 5 years.

  • avatar
    CoreyDL

    Having the actual before and after rating in the article would be nice! :)

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