Mackenzie Wolfgram
October 1st, 2015
VW Financing Operations Take a Hit
As was recently brought to light, Volkswagen has been installing “defeat devices” in order to cheat emissions standards on their diesel models. These vehicles are in actuality, producing 40 times the level of legal nitrogen emissions, while the EPA testing had deemed them legal. This scandal has obviously had a massive impact on the stock price and sale rates of VW vehicles, however the impacts don’t stop there as the financing division of VW is encountering severe difficulties with bond prices and loan abilities.
As the largest car company in the world, VW is flush with cash, and has taken over many of its loan and financing operations. This has been very lucrative for them as their financing division Volkswagen Financial Services AG, (former name) was responsible for about 14% of VW’s overall profit. This is equivalent to around 18 billion annually, representing 12.6 million different contracts. Now VW officials are worries that they are going to have to cut back on loaning activity. VW uses their stock of cars as collateral when offering loans, and now, it looks like their cars are about to become quite a bit less valuable, in the short term at least. For them, this not only means a decrease in the ability to earn profit from selling cars, but an impending write down of the value of their assets, harming the balance sheets.
Another big hit that was taken since this scandal broke was VW’s place in the bonds market. The European Central Bank has temporarily disallowed VW asset backed bonds in their bond buying programs, as they continue to review to implications of the situation, and what it means for the future of VW, and well as the value of their bonds. The value of VW bonds has already dropped significantly, and the value of their companies shares of stock fell by about a third immediately following disclosure of the scandal. In addition, VW was taken off of the Dow Jones Sustainability Index, a tracking of the top 10% of environmental leaders in different industries. Another bad piece of news for VW is a recent credit downgrade by Moody’s, who no longer considers the outlook of VW “stable.”
This credit downgrade will make it harder and more expensive for VW to borrow money, downgrade the price of their long term assets, and do even more to hurt their stock price. Also, even once the emissions scandal blows over, which it probably will, this poor credit rating will likely remain. Making a full recovery even more difficult for the car maker. Fading into obsolescence, at least in the short term, is very unlikely for VW, who manufactures one of every four cars in western europe. However, in the short term, they are definitely hurting.
VW Scandal Hurting its Financing Arm
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