VW Cut to A- by S&P as Diesel Scandal May Hurt Rating Again

Is Humility Key to Volkswagen’s Redemption
  • Carmaker's debt is reduced to fourth-lowest investment grade
  • S&P may cut rating as much as two notches on management doubts

Volkswagen AG’s credit rating was cut one level Monday by Standard & Poor’s, which said the German carmaker’s cheating on U.S. diesel-emissions tests indicates management weaknesses that may lead to a further debt downgrade.

S&P lowered the Wolfsburg-based company’s rating on long-term debt to A-, the fourth-lowest investment grade, from A, and said another cut of as much as two notches is possible.

“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 Monday in a statement. “VW’s internal controls have been shown to be inadequate in preventing or identifying alleged illegal behavior” and the potential for other violations “represents a significant reputational and financial risk.”

S&P put Volkswagen on watch for a potential downgrade on Sept. 22 following revelations that a line of the carmaker’s diesel-powered cars had software installed that was used to fool U.S. emissions testers. As many as 11 million vehicles worldwide may have to be fixed to remove the so-called defeat device. The manufacturer’s debt was upgraded to A in September 2014. Its top rating from S&P was AA-, the fourth-highest grade, which it received in 1991, according to data compiled by Bloomberg.

Volkswagen has yet to determine the full cost of the scandal. The company has set aside 6.5 billion euros ($7.4 billion) for repairs and compensation to customers, but has said that won’t be enough. Among lawsuits and regulatory penalties, the U.S. could fine VW as much as $7.4 billion, Sanford C. Bernstein Ltd. estimates.

‘Absolutely Implausible’

“I find it absolutely implausible that senior people would have known about these issues with regard to the testing regime,” Paul Willis, head of Volkswagen’s U.K. operations, said at a parliamentary hearing in London on Monday. “We mishandled the situation. That’s why we need to fix the cars, we need to get the customers in, and put it right.”

Of 1.2 million autos in the U.K. affected by the emissions rigging, about 700,000 2.0 liter-engines will require a software upgrade, while another 400,000 1.6-liter models will each need an injector replacement as well, Willis said. Recalls are likely to start in the first quarter of 2016 after VW and the German government agree on a repair program by the end of this year, with the 2.0-liter engines brought in for fixing first. The goal in the U.K. is to correct all vehicles involved before the end of next year, Willis said.

U.K. sales, “as expected,” have “dropped a little” since news of emission-test rigging broke in September, he said.

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