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Rating Action:

Moody's downgrades ratings of VW Financial Services and VW Bank; outlook remains negative

01 Sep 2017

VW Bank's senior unsecured rating downgraded by three notches

Frankfurt am Main, September 01, 2017 -- Moody's Investors Service today downgraded the long-term senior unsecured debt and issuer ratings of Volkswagen Bank GmbH (VW Bank) by three notches to A3 from Aa3. At the same time, the rating agency downgraded the bank's long-term deposit ratings to A1 from Aa3 and the long-term senior unsecured ratings of Volkswagen Financial Services AG (VW FS AG) and of its guaranteed subsidiaries to A3 from A2, as well as VW FS AG's issuer rating to A3 from A2. The rating outlook on these long-term debt, issuer and deposit ratings remains negative.

Further, the rating agency downgraded VW FS AG's short-term Commercial Paper ratings to P-2 from P-1, and affirmed VW Bank's P-1 short-term Commercial Paper and deposit ratings. Moody's also affirmed VW Bank's Baa1 subordinated debt ratings, its baa2 baseline credit assessment (BCA), its a3 adjusted BCA and its Aa3(cr)/P-1(cr) Counterparty Risk (CR) Assessments. Concurrently, Moody's withdrew the CR Assessments of VW FS AG.

For a list of all affected ratings, please refer to the end of this press release.

RATINGS RATIONALE

RECENT DEVELOPMENTS WITHIN VOLKSWAGEN'S FINANCIAL SERVICES SUBSIDIARIES

Effective 1 September 2017, Volkswagen Aktiengesellschaft (Volkswagen, issuer rating A3 negative) reorganised its financial services operations to streamline its regulatory structure with its European banking operations now coming under the umbrella of VW Bank, and other financial services under the umbrella of VW FS AG. Previously, VW FS AG had acted as the financial holding company of VW Bank, which was a fully consolidated subsidiary. Both entities are now directly owned by Volkswagen and maintain control and profit and loss transfer agreements with the carmaker.

Following the reorganization, VW FS AG oversees most of the group's worldwide non-banking operations, except for those entities directly owned by Volkswagen. The direct Volkswagen subsidiaries include for example VW Credit, Inc. (backed senior unsecured rating A3 negative) which runs the carmaker's US financial services operations and was unaffected by today's rating actions. In addition, VW FS AG is responsible for all banking activities of Volkswagen outside North America and the EU going forward. Its activities will remain locally regulated where currently applicable, but VW FS AG will no longer be the financial holding company directly supervised by the European Central Bank.

VW Bank remains focused on its EU banking activities and remains a regulated bank registered in Germany, with branches and subsidiaries in several other EU countries under the direct supervision of the ECB, which is limiting the scope of its supervision from globally spread loan, lease and ancillary operations to the EU banking business only. Over time, Moody's expects VW Bank to integrate the lending activities of most of its subsidiaries more closely and remove the remaining non-lending activities from ECB oversight.

As a result of the deconsolidation of VW Bank, VW FS AG's balance sheet size shrunk almost by half as of 1 September 2017. At the same time, the integration of additional subsidiaries leads to an increase in the size of VW Bank's total assets by about one third from €58 billion as of 30 June 2017.

DOWNGRADE OF THE RATINGS OF VW FS AG AND WITHDRAWAL OF ITS CR ASSESSMENTS

The downgrade of VW FS AG's debt and issuer ratings reflects the entity's transfer of VW Bank and its subsidiaries with EU banking operations to Volkswagen. In light of the entity's stronger focus on leasing and other non-banking activities such as mobility services and insurance, and also considering that a majority of VW FS AG's business now falls outside the scope of banking regulation, Moody's now applies the Finance Companies rating methodology to VW FS AG's ratings. Previously, the rating agency had applied the Banks methodology.

Under the Finance Companies methodology, Moody's takes into account both the standalone credit profile of VW FS AG and the implicit and explicit support commitment from its sole owner, Volkswagen. VW FS AG's standalone credit profile of Ba2 reflects its strong, but prospectively declining capitalisation, its exposure to residual value risk - particularly in Germany (Aaa stable) - and its geographically diversified funding profile. This funding profile now places a strong emphasis on asset backed securities and wholesale funding, following the deconsolidation of deposit-rich VW Bank. The rating agency believes that the reorganisation does not alter Volkswagen's willingness to fully back its captive finance subsidiary if needed. This assessment leads to five notches of rating uplift to the A3 senior unsecured debt and issuer ratings in line with the parent's issuer rating, and takes into account both the strategic importance of VW FS AG for the distribution of Volkswagen vehicles and the formal commitment of Volkswagen through a long-term control and profit-and-loss transfer agreement.

To entities rated under the Finance Companies methodology, Moody's does not assign CR Assessments, which under the Banks methodology are opinions of how counterparty obligations are likely to be treated if a bank fails. Accordingly, the rating agency withdrew the CR Assessments of VW FS AG.

DOWNGRADE OF THE LONG-TERM RATINGS AND AFFIRMATION OF ALL OTHER RATINGS OF VW BANK

The downgrade of VW Bank's long-term deposit, senior unsecured and issuer ratings reflects the less favorable result of Moody's Advanced LGF Analysis for deposits and senior unsecured debts upon the deconsolidation of VW Bank from VW FS AG, combined with the gradual shift of VW Bank's funding profile towards secured and deposit funding since September 2015. Upon the ownership transfer to Volkswagen, Moody's no longer expects a joint resolution of VW Bank with VW FS AG, a scenario in which investors in VW Bank debt would have benefitted from a sizable stack of structurally subordinated debt issued out of VW FS AG and its guaranteed issuance vehicle Volkswagen Financial Services N.V. (VW FS NV).

In its updated Advanced LGF Analysis, the rating agency assumes that the funding profile of the VW Bank will revert towards a more diversified product structure, more comparable to the funding structure that was in place prior the parent's emission scandal. VW Bank's H1 2017 report confirms that the bank has already initiated such a funding structure rebalancing. The joint impact of the reorganization, and of the funding profile shift, results in a new assessment of a moderate loss-given-failure for senior unsecured debt and no rating uplift from the a3 adjusted BCA (compared with three notches of rating uplift previously). It also results in a very low loss-given-failure for deposits and two notches of rating uplift (compared with three notches previously), and unchanged extremely low loss-given-failure and three notches of uplift for VW Bank's CR Assessment. VW Bank's subordinated debt continues to face a high loss severity in the unlikely event of failure, leading to an affirmation at Baa1, one notch below the a3 adjusted BCA.

For VW Bank, like for VW FS AG, Moody's believes that the change to a direct ownership by Volkswagen does not impact the carmaker's willingness to fully back its captive finance subsidiary if needed. This assessment leads to an alignment of its adjusted BCA with the parent's issuer rating and it takes into account both the strategic importance of VW Bank for the distribution of Volkswagen vehicles and the formal commitment of Volkswagen through a profit-and-loss transfer agreement.

Because short-term bank issuance programs and deposits legally rank pari passu with long-term deposits in Germany, these ratings map to the bank's A1 long-term deposit ratings and were accordingly affirmed at P-1 for VW Bank.

AFFIRMATION OF VW BANK'S BCA REFLECTS IMPROVEMENTS IN CAPITALISATION

Moody's affirmation of the baa2 BCA of VW Bank is based on an improvement in the bank's financial metrics, in particular due to several capital increases provided by Volkswagen through VW FS AG in 2016 and in 2017. These have helped VW Bank boost risk-weighted capital ratios, which now provide an adequate level for expected ongoing lending growth. The BCA affirmation further reflects that VW Bank continues to benefit from above average profitability. Since the carmaker's diesel issue arose, the bank's even more relevant role as a provider of lending and service packages for Volkswagen's new car sales has supported the bank's unabated retail lending growth. Based on Volkswagen's targets under the "TOGETHER -- Strategy 2025", Moody's expects the automaker to remain focused on further growth of the financial services segment and to support the risk-return dynamics of its captives through subsidies and the assumption of asset risks, if needed.

NEGATIVE OUTLOOK FOR VW BANK AND VW FINANCIAL SERVICES IS DRIVEN BY PARENT OUTLOOK

The negative rating outlook on the long-term debt and issuer ratings of VW FS AG and VW Bank as well as on the long-term deposit ratings of the latter is related to the negative outlook on the A3 long-term issuer rating of Volkswagen, the parent of VW FS AG and VW Bank.

WHAT COULD MOVE THE RATINGS UP/DOWN

As indicated by the negative outlook, we currently do not expect upward pressure to arise on the ratings of VW FS AG and VW Bank.

Due to the intrinsic interlinkages of VW FS AG and VW Bank with their automotive parent, their ratings are highly dependent on the creditworthiness of Volkswagen, whose ratings also have a negative outlook.

As a result, a downgrade of Volkswagen would result in a similar rating action on VW Bank's adjusted BCA and long-term ratings and in a downgrade of VW FS AG's long-term ratings.

VW Bank's long-term debt and deposit ratings may be further downgraded if the bank's liability structure unexpectedly shifted towards an even greater reliance on deposit and secured funding sources, thereby reducing the layer of subordinated and / or equal-ranking debt for the respective liability classes.

At the same time, a BCA upgrade or downgrade for VW Bank will, in the absence of changes to Volkswagen's ratings and/or support probability, not lead to changes in the bank's long-term ratings. Similarly, a change in VW FS AG's standalone credit strength is unlikely to result in a change of the entity's ratings.

LIST OF AFFECTED RATINGS

Issuer: Volkswagen Bank GmbH

..Downgraded:

....Long-term Bank Deposits (Local & Foreign), Downgraded to A1 from Aa3, Outlook remains Negative

....Issuer Rating (Local & Foreign), Downgraded to A3 from Aa3, Outlook remains Negative

....Senior Unsecured (Local), Downgraded to A3 from Aa3, Outlook remains Negative

....Senior Unsecured Medium-Term Note Program (Local), Downgraded to (P)A3 from (P)Aa3

..Affirmed:

....Long-term Counterparty Risk Assessment, affirmed at Aa3(cr)

....Short-term Counterparty Risk Assessment, affirmed at P-1(cr)

....Short-term Bank Deposits (Local & Foreign), affirmed at P-1

....Subordinate (Local), affirmed at Baa1

....Subordinate Medium-Term Note Program (Local), affirmed at (P)Baa1

....Other Short Term (Local), affirmed at (P)P-1

....Commercial Paper (Local), affirmed at P-1

....Adjusted Baseline Credit Assessment, affirmed at a3

....Baseline Credit Assessment, affirmed at baa2

..Outlook Action:

....Outlook remains Negative

Issuer: SkoFIN s.r.o.

..Downgraded:

....Backed Commercial Paper, Downgraded to P-2 from P-1

..Outlook Action:

....No Outlook assigned

Issuer: Volkswagen Financial Services AG

..Downgraded:

....Long-term Issuer Ratings (Local & Foreign), Downgraded to A3 from A2, Outlook remains Negative

....Senior Unsecured (Local), Downgraded to A3 from A2, Outlook remains Negative

....Senior Unsecured Medium-Term Note Program (Local), Downgraded to (P)A3 from (P)A2

....Commercial Paper (Local), Downgraded to P-2 from P-1

..Withdrawn:

....Long-term Counterparty Risk Assessment, previously Aa3(cr)

....Short-term Counterparty Risk Assessment, previously P-1(cr)

..Outlook Action:

....Outlook remains Negative

Issuer: Volkswagen Leasing GmbH.

..Downgraded:

....Backed Senior Unsecured (Local), Downgraded to A3 from A2, Outlook remains Negative

....Backed Senior Unsecured Medium-Term Note Program (Local), Downgraded to (P)A3 from (P)A2

....Backed Other Short Term (Local), Downgraded to (P)P-2 from (P)P-1

....Backed Commercial Paper (Local), Downgraded to P-2 from P-1

..Outlook Action:

....Outlook remains Negative

Issuer: Volkswagen Financial Services Australia Ltd

..Downgraded:

....Backed Senior Unsecured (Local), Downgraded to A3 from A2, Outlook remains Negative

....Backed Senior Unsecured Medium-Term Note Program (Local & Foreign), Downgraded to (P)A3 from (P)A2

....Backed Other Short Term (Local), Downgraded to (P)P-2 from (P)P-1

..Outlook Action:

....Outlook remains Negative

Issuer: Volkswagen Financial Services Japan Ltd.

..Downgraded:

....Backed Senior Unsecured (Local), Downgraded to A3 from A2, Outlook remains Negative

....Backed Senior Unsecured Medium-Term Note Program (Foreign), Downgraded to (P)A3 from (P)A2

....Backed Commercial Paper (Local), Downgraded to P-2 from P-1

....Backed Other Short Term (Foreign), Downgraded to (P)P-2 from (P)P-1

..Outlook Action:

....Outlook remains Negative

Issuer: Volkswagen Financial Services N.V.

..Downgraded:

....Backed Senior Unsecured (Foreign), Downgraded to A3 from A2, Outlook remains Negative

....Backed Senior Unsecured Medium-Term Note Program (Local), Downgraded to (P)A3 from (P)A2

....Backed Commercial Paper (Local), Downgraded to P-2 from P-1

..Outlook Action:

....Outlook remains Negative

PRINCIPAL METHODOLOGIES

The principal methodology used in rating Volkswagen Financial Services AG, Volkswagen Financial Services Australia Ltd, Volkswagen Financial Services Japan Ltd., Volkswagen Financial Services N.V., Volkswagen Leasing GmbH and SkoFIN s.r.o. was Finance Companies published in December 2016. The principal methodology used in rating Volkswagen Bank GmbH was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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

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

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

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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