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Moody's cuts Volkwagen's credit rating amid emissions scandal
[WASHINGTON] Moody's hit embattled German automaker Volkswagen with a credit downgrade on Wednesday, saying the company's reputation and earnings were at risk from the growing emissions cheating scandal.
Moody's cut the company's rating by one step to A3, citing expanded allegations on emissions cheating and the company's admission that it falsified fuel consumption levels on some cars.
"In Moody's view, these new developments pose additional risk to Volkswagen's reputation, future sales and cash," the ratings agency said.
"They also suggest serious internal control and governance issues, which may be more widely spread than believed initially."
Moody's particularly cited the US Environmental Protection Agency's accusation on Monday that the company included emissions-cheating defeat devices on high-end 3.0 litre diesel engines, in addition to the 2.0 litre diesels Volkswagen admitted in September had the illegal devices that hid the amount of nitrogen oxide emitted.
The larger engines are installed on high-priced Volkswagens, Audis and the Porsche Cayenne.
"This new notice of violation concerns the last generation of diesel engines and more widely affects Volkswagen's premium brands - Audi and Porsche - which are top contributors to Volkswagen's profitability," Moody's said.
The new EPA accusation, which Volkswagen denied, means VW will probably be locked in protracted litigation and could result in costly remediation, both in fines and more restrictions on its activities in the future, Moody's said.
Moody's also pointed to Volkswagen's announcement Tuesday that, in addition to the 11 million cars involved in the defeat device scandal, another 800,000 showed "inconsistencies" on carbon-dioxide emissions and fuel consumption.
The company estimated this latest revelation could cost it two billion euros (S$3 billion).
But Moody's said that Volkswagen's business and financial strength give it room to shore up its cash flow for unplanned costs, and so justify the medium investment grade credit rating of A2.
Moody's rival Standard & Poor's, which dealt Volkswagen a downgrade on October 12, held its rating unchanged at A- on Wednesday, noting that Volkswagen's S&P rating is already on a negative watch. S&P's A- grade is roughly equivalent to a Moody's rating of A3.
S&P noted Volkswagen's announcement Tuesday that it had identified irregularities related to CO2 levels and fuel consumption levels in some of its vehicles.
"This development... extends and deepens the scope of the risks and costs facing the company... and demonstrates the wide-ranging negative credit consequences facing the company," S&P said.