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Global Credit Research - 23 Sep 2010
Junior subordinated debt rating is downgraded to Baa2
Frankfurt am Main, September 23, 2010 -- Moody's Investors Service has today downgraded the bank financial strength
rating (BFSR) of Volkswagen Bank GmbH ("VW Bank") to C- from
C+. The bank's dated junior subordinated debt maturing
on 31 December 2011 (Genussscheindarlehen, DE0008107921) is downgraded
to Baa2 from Baa1. However, VW Bank's A2 long-term
ratings and its A3 subordinated ratings have been confirmed. The
outlook on all ratings is stable. The P-1 short-term
rating is not affected. Today's rating action concludes the review
for downgrade initiated on 19 May 2009.
The change in VW Bank's BFSR to C- from C+ was primarily
driven by Moody's revised assessment of the bank's franchise
value and risk positioning. However, Moody's continues
to view the bank's financial profile as adequate for its business
risk, which is a key stabilising factor for positioning the ratings
in the C- category. The long-term ratings of VW Bank
benefit from a very high probability of support from Volkswagen AG (VW
Group (A3/stable)), which is the sole owner of the bank, and
a moderate probability of systemic support due to its sizeable retail-deposit
taking activities. This results in a two-notch uplift from
the bank's Baa1 baseline credit assessment (BCA).
"As a wholly owned captive-finance and non-diversified
company that supports the sales of VW Group, VW Bank remains exposed
to the global automotive cycle, which includes dealer and consumer
financing of cars and related products", says Claude Raab,
an analyst in Moody's Financial Institutions Group. "As
a monoline institution, VW Bank has little diversity of revenue
and income outside of the automotive industry."
Moody's says that the decision to downgrade the bank's BSFR
also takes into consideration VW Bank's stand-alone risk
positioning. "There has been seen a significant increase
in the level of inter-company loans to other entities within Volkswagen
Financial Services AG (VWFS), which now represent a meaningful portion
of the bank's Tier 1 capital," continues Mr.
Furthermore, the rating agency recognises that VWFS which is a regulated
entity and the direct parent for VW Bank plays an important role in supporting
VW Group's international growth plans over the medium term potentially
also leveraging the bank's capacities.
As a result, Moody's expects an increasing share of revenues
and profitability to be generated from markets in which the Group sees
future growth. This objective represents a challenge for its risk
Moreover, Moody's remains concerned about the increase in
the level of the bank's problem loans, which account for more
than three percent of gross loans in 2009. Moreover, the
absolute growth in problem loans may be masked by the absolute loan volume
growth over recent years. Given the gradual expansion of the bank,
its asset quality may deteriorate further going forward, which could
result in higher risk costs. In this respect, Moody's
expects that the bank would price its risks accordingly.
The stable outlook of the BFSR incorporates Moody's expectation
that VW Bank will be able to offset the risks associated with its industry
concentrations given its sound financial profile. This assessment
is supported by the bank's adequate profitability to date as well
as a capital base which the rating agency regards as solid to withstand
Moody's stress tests. Furthermore, the stable outlook
anticipates that future growth will be balanced and controlled,
allowing for sufficient internal capital generation.
VW Bank's A2 long-term deposit rating incorporates a very
high probability of parental support provided by VW Group, which
results in a one-notch uplift to an adjusted BCA of A3.
This aligns the rating of the bank with that of its ultimate parent,
VW Group(A3/stable). This assessment reflects Moody's view
that VW Bank would enjoy support from the Group in the event of need given
its integral role in its expansion strategy. Moreover, over
the last few years, VW Bank has increased its (mainly retail) deposit
funding base considerably. Consequently, the bank's
long-term ratings of A2 now incorporate a one-notch uplift
from the adjusted BCA due to Moody's assumption of a moderate degree
of systemic support. The stable outlook is linked to the stable
outlook on the BFSR.
The downgrade of the dated junior subordinated debt maturing on 31 December
2011 (Genussscheindarlehen, DE0008107921) to Baa2 from Baa1 reflects
the change in the adjusted BCA to A3 from A2. The junior subordinated
debt rating is two notches below the adjusted BCA, reflecting its
junior subordinated claim in liquidation, and its cumulative deferral
and principal write-down features linked to a balance-sheet
loss trigger. The adjusted BCA reflects the bank's standalone credit
strength, including parental and/or cooperative support, if
applicable. The adjusted BCA excludes systemic support expectations.
The stable outlook is line with the outlook on the BFSR.
An upgrade of VW Bank's BFSR and long-term ratings is currently
not envisaged. Positive rating pressure could emerge over time
from a diversification of revenue and income streams outside automotive-related
financing, thereby reducing its dependence on a single industry
and the level of related-party risks in relation to the bank's
Tier 1 capital.
Downward pressure on the BFSR could emerge from a decline in VW Group's
auto sales and the effectiveness of the distribution channel. The
ratings could be downgraded should the bank's risk profile deteriorate
above Moody's expectations, leading to higher problem loans
for consumer and dealer financing in the future. Furthermore,
Moody's could review the ratings of VW Bank should it acquire the
remaining 50% stake of its equity investment in LeasePlan Corporation
N.V. (A3/C, negative). Moreover, if the
long-term ratings of VW Group were to come under pressure,
so would the long-term ratings of VW Bank.
An upgrade of the hybrid security debt would follow an upgrade of the
BFSR or long-term ratings of VW Group, leading to a higher
adjusted BCA of VW Bank. Accordingly, the ratings of the
hybrids could be revised downwards should the BFSR or long-term
ratings of VW Group be lowered.
PREVIOUS RATING ACTIONS AND METHODOLOGIES
The last rating action on VW Bank was implemented on 25 February 2010,
when Moody's downgraded Volkswagen Bank's hybrid security rating
The principal methodologies used in rating Volkswagen Bank GmbH were Bank
Financial Strength Ratings: Global Methodology published in February
2007, Incorporation of Joint-Default Analysis into Moody's
Bank Ratings: A Refined Methodology published in March 2007,
and Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated
Debt published in November 2009. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found on Moody's website.
Headquartered in Braunschweig, Germany, VW Bank had total
assets of EUR34 billion as of the end of June 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service's information.
Moody's Investors Service considers the quality of information available
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a credit rating.
The rating has been disclosed to the rated entity or its designated agents
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Please see ratings tab on the issuer/entity page on Moodys.com
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Moody's downgrades Volkswagen Bank's BFSR to C-; A2 long-term rating confirmed
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