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Announcement:

Moody's: VW used car price pressure poses additional risks

28 Oct 2015

Frankfurt am Main, October 28, 2015 -- Weakness in prices for used diesel cars poses additional risks for Volkswagen, with affiliates bearing some residual value risks, says Moody's Investors Service in a report published today.

Moody's report, entitled "Weakness in Prices for Used Diesel Cars Poses Additional Risk," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release. The rating agency's report is an update to the markets and does not constitute a rating action.

"Pressure on the resale prices of Volkswagen AG's used diesel vehicles could weigh on the carmaker's financial flexibility as we expect it to shoulder some of the burden of this residual value (RV) risk the various parties involved in selling, financing and renting VW diesel cars face," says Bernhard Held, an Assistant Vice President at Moody's Financial Institutions Group. Accordingly, the rating agency expects that the company will most likely have to increase provisions and/or book impairment losses.

The residual value risk -- the risk of a larger-than-anticipated fall in the price for the leased asset/loan collateral between a contract's conclusion and a pre-agreed repurchase -- emanates from loan and leasing transactions with private car buyers, as well as from buy-back agreements with business customers, such as leasing and car rental firms.

Because the accounting treatment of RV risk and the associated provisioning decisions relate first and foremost to direct, contractual obligations, Moody's considers it likely that the carmaker will have to increase its provisions to cover additional costs or record impairment losses.

"Recent events have increased the risk of an erosion in resale values, so we expect to see VW replenish its reserves or incur impairment losses. The total amount needed is subject to the magnitude of decline in the resale value, which VW will have to assume for emission scandal affected, and possibly non-affected, cars," says Yasmina Serghini-Douvin, a Vice President at Moody's Corporate Finance Group.

Moody's research shows a limited number of securitisations have direct residual value risk exposure, which relates to the value of the underlying vehicles in an asset-backed securitisation transaction after the end of a financing contract.

"Volkswagen's two US ABS lease deals have direct RV risk exposure. In Europe, most Volkswagen-sponsored auto loan and lease transactions only have indirect exposure to the market-value fluctuations of the vehicle provided as security if the customer defaults," says Antonio Tena, an Assistant Vice President at Moody's Structured Finance Group. "Hence, declines in the values of VW vehicles as a result of the automaker's diesel emissions problems will not directly affect most VW-sponsored ABS transactions that we rate but some transactions will have larger risk exposure depending on the jurisdiction, type of securitization and the transaction structure" says Mehdi Ababou a Vice President at Moody's Structured Finance Group.

The rating agency says VW's US floorplan trust also has exposure to the market value risk that the value of the vehicles will fall below the amount at which the dealer's inventory is financed. The VW emissions issue has raised questions over whether customers will try to terminate, cancel or rescind their financing agreements for diesel-engine vehicles. "In the US and Europe, recalls have not historically been a defence against repayment of a loan or lease. However, the impact on a VW loan portfolio is more difficult to forecast because this recall is unique," says Corey Henry a Vice President at Moody's Structured Finance Group.

However, in the context of the expected recall of up to 11 million vehicles worldwide, Moody's expects that the company will not only abide by its contractual buy-back agreements, but also pro-actively protect the functioning and readiness of its key vehicle distribution and funding channels.

"Therefore, our central scenario is for VW AG to use its financial strength to contain any economic damage incurred by its diverse business partners as well as protect the franchise and its brands should the resale value of the affected diesel cars fall," says Ms. Serghini-Douvin. "We expect that the most integral parts of VW's key distribution channels, its dealerships and its captive finance subsidiaries will be the main beneficiaries from any compensation measures."

Subscribers can access the report at:

http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1009016

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: London +44-20-7772-5456, New York +1-212-553-0376, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Bernhard Held
Asst Vice President - Analyst
Financial Institutions Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's: VW used car price pressure poses additional risks
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