Autos

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Is there light at the end of the tunnel for Volkswagen? The market seems to think so.

Initially, it looked as if the crisis and recall of 11 million cars would do serious long-term damage to VW's reputation, sales and cash flow. Recent news has been a bit better. The technical fix for the 8.5 million affected diesel vehicles in Europe is relatively straightforward and could be completed next year. Suspicions of illegal discrepancies in carbon-dioxide emissions proved unfounded. VW has stuck with a 6.7 billion euros ($7.4 billion) provision for recall costs, which would have swallowed up about half of last year's net income.

Granted, VW can't calculate the total crisis-related costs, not least because it doesn't know the size of U.S. fines or how much lawyers will extract in various civil lawsuits. Being forced to buy back affected U.S. vehicles could cost as much as $9.4 billion, according to Bloomberg Intelligence.

There are still understandable jitters about the impact of the scandal on revenue, with the VW brand suffering a 25 percent decline in U.S. sales last month. CEO Matthias Mueller said on Thursday that the group's orders rose 3.5 percent in the first 11 months of the year and saw no reason to adjust his forecast that 2015 car sales would match last year's.

The non-voting preference shares have risen 40 percent since the start of October. That's narrowed the loss in market capitalization since the scandal erupted to 12 billion euros. To put that in context, VW's market cap slumped 40 billion euros from a peak in March until September, immediately before diesel-gate, largely because of worries over a slowdown in China.

Shrinking Value
Volkswagen's market capitalization has shrunk this year
Source: Bloomberg data

The recent share price recovery reflects in part an improved outlook in China, a market that contributed 39 percent of VW car sales last year. Industry-wide, Chinese sales of new cars rose 18 percent in November after the government cut sales taxes. What happens in China is probably more important for VW's long-term prospects than its difficulties in the US, which accounted for just 6 percent of group car sales last year.

So there is an argument that the sell-off is overdone, even if you account for the risk from a lack of visibility on the eventual cost of the crisis. UBS estimates about 34 billion euros for scandal-related costs, but says the share price implies about 50 billion euros of costs (based on the bank's sum of the parts valuation).

Are investors becoming complacent? It remains twice as expensive to insure VW's debt against default for five years compared to before the scandal.

But VW has resources to call on before bond investors would face any pain. Its automotive unit had 19.8 billion euros in cash and cash equivalents at the end of September, plus 11.9 billion euros in marketable securities. In addition, it has negotiated a 20 billion-euro bridge financing facility with banks.

Mueller said those financing talks showed VW's good reputation with the investment community was intact and a glance at VW's bonds suggest debt markets have become more relaxed about the scandal. The yield to maturity on a VW seven-year bond due to mature in 2020 is still elevated at 1.47 per cent, compared with a low of 0.4 percent in February. Yet this is much narrower than the 2.9 per cent in September when the crisis broke.

And while VW executives have had to give up their Airbus A319 corporate jet, they aren't parting with any of the company's 12 brands, among them Audi and Ducati. That's another sign of confidence.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net