London, 19 October 2012 -- Moody's Investors Service has today announced rating actions affecting
four European auto captive finance groups. These actions reflect,
to varying degrees, the combined pressures from (1) the general
adverse impact of the deterioration in macroeconomic conditions in Europe,
in particular on the auto manufacturing industry; (2) concentrated
exposures to car dealers, which are highly correlated with the manufacturers;
(3) high reliance on market funding, which can be subject to sudden
changes in investor confidence; and (4) some reliance on bank credit
lines, the availability and terms of which could be compromised
by funding pressure on the banking industry and the prospect of regulatory
changes.
Moody's has therefore today placed on review for downgrade:
- the C-/baa2 standalone Bank Financial Strength Rating
(BFSR) and standalone credit assessment and the Baa2/Prime-2 debt
and deposit ratings of RCI Banque and its subsidiaries;
- the Baa3 long-term issuer rating of FGA Capital;
and,
- the C-/baa1 standalone BFSR and standalone credit assessment
of Volkswagen Bank GmbH, whilst at the same time affirming the bank's
A3/Prime-2 senior unsecured debt ratings and its positive outlook.
Moody's has also:
- maintained the review for downgrade on all ratings of Banque
PSA Finance and its subsidiaries; and,
- affirmed the A3 unsecured debt rating of Volkswagen Financial
Services AG; outlook positive.
RATINGS RATIONALE
European auto captive financial institutions support the sales of their
industrial parents by offering auto loans and related services to retail
and corporate customers, as well as loans to car dealers to help
them finance their inventories. Their ratings are constrained by
their lack of business diversification, large exposures to car dealers,
and in some cases by their inherent linkages with their lower-rated
industrial parents. On the funding side, these firms are
dependant, to varying degrees, on access to senior unsecured
and asset-backed securitisation markets as well as credit lines
provided by larger banks. Indeed, these are characteristics
more commonly associated with speculative grade ratings, as shown
by the rating levels of certain other non-bank auto finance companies
with similar business models.
However, Moody's notes that most of these firms have banking
licenses, and for this reason they are subject to the same regulatory
standards as other credit institutions and to ongoing supervision,
which afford a certain level of protection to creditors, as well
as offering access to central bank facilities. In addition,
rated European auto captive firms currently display some healthy credit
features, including good capitalization levels, sound profitability
and a greater degree of asset and liability matching than traditional
retail and commercial banks.
The key drivers for today's review are:
(1) DETERIORATING MACRO FUNDAMENTALS
Moody's expects auto captive banks to be negatively affected by
the anticipated difficult economic conditions in Europe, as is the
case for European banks more generally. In particular, Moody's
expects this environment to impact the European auto industry, which
will likely experience sluggish demand in 2013, and forecasts that
western European light vehicle demand will contract in 2013 by 3%
(for further details, see Moody's report "Global Automotive
Manufacturers: Sluggish European Demand Continues To Weigh On Global
Auto Sales Growth", published on 17 September 2012).
These factors will together result in lower activity levels for auto finance
banks, although Moody's recognizes that the impact of lower
car sales could be mitigated in the short-term by an increased
proportion of vehicles financed (a higher penetration rate) and/or some
cost flexibility. In addition, the poor economic backdrop
will likely result in weakening asset quality and therefore higher provisioning
costs, although there has been limited deterioration to date.
Together with higher funding costs, Moody's expects this to weigh
on profitability.
In some cases, ratings on captive auto banks could be constrained
by the creditworthiness of their lower-rated manufacturing parents
due to the intrinsic strategic, commercial and financial links between
them.
(2) CONCENTRATED EXPOSURES TO CAR DEALERS
European auto captive banks lend to car dealers in order to finance their
inventories, the soundness of which is highly correlated with the
performance of the auto sector, in Moody's view. Although
these portfolios are spread across many borrowers and are normally collateralized
by vehicles, Moody's considers that these exposures,
accounting for about a quarter of the banks' loan portfolios and
multiples of their Tier 1 capital, represent a substantial aggregate
risk due to this inherent correlation. In addition, Moody's
believes that the value of the vehicles, representing the collateral
against car dealer exposures, may decline in case of default of
the parents. Given the headwinds faced by the auto industry,
Moody's believes that these concentration risks may not be adequately
reflected in current ratings.
(3) HIGH RELIANCE ON MARKET FUNDING
Most of the European auto captive institutions are almost entirely reliant
on wholesale-funding, which can be subject to sudden changes
in investor confidence. This may ultimately result in restricted
market access and increased funding costs. These firms aim to match
the maturity profile of their liabilities with that of their assets,
limiting maturity transformation and therefore reducing refinancing risk.
However, restricted market access could lead to reduced funding
duration, which could constrain loan origination, affecting
the strength of the auto captive firms' franchises and ultimately
reducing their earnings generation.
(4) RELIANCE ON BANKS' CREDIT LINES
Funding and liquidity reserves at these firms are, to varying degrees,
dependant on (i) funding arrangements with their parents, and (ii)
credit facilities provided by other banks. Moody's believes
that current conditions for European banks -- notably deleveraging
efforts -- could reduce their continued willingness to extend such
credit lines. Moreover, the forthcoming Basel III regulatory
changes to the treatment of interbank credit facilities will reduce the
incentive to provide these lines on current terms. This could potentially
result in changes to the availability and pricing of funding for auto
captive firms.
BANK SPECIFIC RATING CONSIDERATIONS
Banque PSA Finance (BPF)
BPF's D+/baa3 BFSR and standalone credit assessment,
Baa3 long-term debt and deposit rating, Prime-3 short-term
debt and deposit rating, and provisional (P)Ba1 and (P)Ba2 subordinated
and junior subordinated debt programmes remain under review for downgrade.
This follows Moody's announcement of 10 October 2012 that BPF would
remain under review for downgrade to consider the impact of the downgrade
to Ba3 of its parent (Peugeot S.A.; PSA, Ba3/Negative),
including any actions which the bank might take to reduce its correlation
with PSA, or otherwise to protect its own creditworthiness.
The review will also consider the impact of the support that BPF could
receive from both its partner banks and the French government, according
to an interview given by the French Finance Minister published on 18 October
2012.
BPF's long-term ratings reflect the bank's fundamentals including
Moody's view that BPF's creditworthiness is inherently linked to
that of PSA, given the intricate strategic, commercial and
financial ties to its parent. These credit linkages with PSA include
(i) BPF's dependence on PSA for its own business and franchise value;
(ii) the potential, therefore, for adverse developments at
PSA to impact BPF's funding capacity; (iii) the ability of PSA to
require BPF to pay exceptional dividends (Moody's notes that a EUR360
million exceptional dividend was paid in 2012); (iv) BPF's credit
exposures to PSA's car dealer networks; and, (v) the risk associated
with a possible decline in the value of the vehicles, representing
the collateral against BPF's loan book, that could materialize
in case of default of PSA. On the other hand, Moody's
recognizes that BPF's financial performance has so far shown little correlation
with that of the car manufacturer, and that its credit profile is
otherwise healthier, considering the bank's good capitalization
and profitability track record, and its policy of maintaining a
positive liquidity gap.
BPF is a strategic service provider for its parent, as it financed
28.1% of new PSA registrations in the first half of 2012.
The institution has a banking license and is therefore supervised by the
French banking supervisory authority. BPF claims it has a match-funded
profile, and therefore little refinancing risk. The bank
has stated in its H1 2012 financial report, that it could secure
its commercial business activity for the following 12 months at least
without having recourse to unsecured public funding markets, by
increasing its securitization programmes and using its c.EUR8 billion
worth of undrawn committed credit facilities. However, as
noted above, Moody's believes that forthcoming Basel III regulatory
changes to the treatment of interbank credit facilities will reduce the
incentive to provide these lines on current terms. This could potentially
result in changes to the availability and pricing of funding for BPF.
Moody's has also maintained its review on the Baa3 backed senior
unsecured rating of Peugeot Finance International NV, and on the
Prime-3 backed commercial paper rating of SOFIRA SNC.
RCI Banque
RCI Banque's C- BFSR and baa2 standalone credit assessment,
the Baa2 long-term debt and deposit rating, the Baa3 subordinate
rating and the Prime-2 short term rating were today placed on review
for downgrade. During this review,
Moody's will assess whether the following factors are still compatible
with its current Baa2 long-term rating:
(i) the high concentration of RCI Banque to car dealers, corresponding
to 26% of its loan book as at end-June 2012; and
(ii) its almost entirely wholesale-funded profile.
RCI Banque is a strategic service provider for its parent, Renault
S.A. (Ba1/Stable), financing 34.3% of
new Renault and Nissan registrations in the first half of 2012.
The institution has a banking license and is therefore supervised by the
French banking supervisory authority. RCI Banque claims it has
a funding surplus, and therefore little refinancing risk,
as it finances its assets with longer-dated liabilities.
The bank stated in the H1 2012 Financial Report that it could carry out
its commercial business activity for more than twelve months without having
recourse to unsecured public funding markets, due to its EUR6.4
billion liquidity reserve. However, in this scenario it would
use EUR4.5 billion of its available confirmed lines of credit,
which Moody's believes could be subject to changes in availability
and pricing in response to forthcoming Basel III regulatory changes,
as noted above.
The (P) Baa2 senior unsecured medium-term notes (MTN) rating and
Prime-2 short-term rating of RCI Banque's subsidiary
DIAC have also been placed on review for downgrade.
FGA Capital S.p.A. (FGA Capital)
FGA Capital's Baa3 issuer rating was today placed on review for
downgrade. During this review, Moody's will assess
whether the following factors are still compatible with its current Baa3
issuer rating:
(i) the impact of the weakening credit profile of its 50% shareholder,
Fiat SpA (Fiat), as demonstrated by its recent credit rating downgrade
to Ba3 from Ba2 (see press release "Moody's downgrades Fiat
to Ba3; negative outlook", published on 10 October 2012);
(ii) the high concentration of FGA Capital to car dealers, corresponding
to 26% of its loan book, as at end-June 2012;
(iii) greater pressure on profitability; and
(iv) its wholesale-funded profile -- albeit partly mitigated
by funding support from its 50% shareholder Credit Agricole S.A.(CASA,
A2/Negative; D/ba2).
FGA Capital is the captive auto-finance company of its ultimate
50% industrial parent Fiat. It is a 50/50 joint venture
between Fiat Group Automobiles Spa (100% owned by Fiat) and Credit
Agricole Consumer Finance S.A. (100% owned by CASA).
The joint venture agreement can be terminated by both parties after the
end of 2014. At end-June 2012, CASA provided 40%
of funding (including equity) for this venture. Moody's notes
that, despite not being a bank, FGA Capital is a financial
institution regulated and supervised by the Bank of Italy under a regime
that differs from that for credit institutions. However,
in some of the other European jurisdictions in which it operates,
it is recognized and regulated as a bank.
The backed Baa3 senior unsecured debt and European medium-term
note programme of its subsidiary FGA Capital Ireland P.L.C.
have also been placed on review for downgrade.
Volkswagen Bank GmbH (VW Bank)
VW Bank C-/baa1 standalone credit assessment was placed on review
for downgrade. At the same time, Moody's affirmed the
A3/Prime-2 long-term and short-term debt and deposit
rating as well as the Baa1 subordinated debt rating. During the
review, Moody's will assess the vulnerability of the bank
to the following factors:
(i) risks arising from its high concentration to car dealers, which
amounted to 24% of its loan book as at end-June 2012;
(ii) refinancing risk, in the context of its limited dependence
on market funding sources such as senior unsecured bonds and asset-backed
securities, and the fact that 61% of VW Bank's balance
sheet liabilities consisted of retail as well as corporate deposits as
of end-June 2012; and
(iii) pressures resulting from Volkswagen's global captive finance
activities, mainly conducted by Volkswagen Financial Services AG,
which VW Bank provides with a high level of intercompany loans,
compared to the bank's capital.
VW Bank's A3 long-term debt and deposit ratings (with positive
outlook) incorporate Moody's view of a very high probability of VW Bank
receiving support from its ultimate owner Volkswagen AG (VW, A3
positive) in the event of need. This support -- evidenced
by a comfort letter from its immediate parent, Volkswagen Financial
Services AG (VWFS, A3/Prime-2, positive outlook,
the main financial arm of VW) -- results in the long-term
ratings of VW Bank being aligned with those of VWFS. The ratings
are therefore affirmed at A3/Prime-2 with a positive outlook,
a one notch uplift from the bank's current baa1 standalone credit strength.
Volkswagen Financial Services AG (VWFS)
The A3 long-term unsecured debt rating of VWFS was affirmed with
a positive outlook. VWFS itself is a highly integrated part of
VW AG and benefits from a profit pooling agreement with its ultimate owner
VW AG. Therefore, VWFS's rating benefits from a very
high level of parental support and thus remains aligned with those of
its immediate parent.
WHAT COULD CHANGE RATINGS UP / DOWN
Moody's believes there is little likelihood of any upward rating pressure
for any of the firms covered by today's announcement, because of
the four main pressure points discussed above. Even in the case
of a more favorable operating environment, these institutions'
narrow business focus and wholesale funding profiles would nevertheless
suggest a standalone rating no higher than the 'baa' category,
and indeed display some characteristics more commonly associated with
speculative grade ratings, as shown by the rating levels of certain
other non-bank auto finance companies with similar business models.
A downgrade of the firms included in the review announced today could
be triggered by one, or a combination of the following factors:
(i) Moody's view that the current rating levels may not adequately
reflect the pressure points stemming from the weakening operating environment;
(ii) Moody's view that the current ratings may not adequately reflect
the institutions' large exposures to car dealers and that capitalization
may be weakened under its portfolio stress assumptions; (iii) the
possibility of refinancing challenges in the context of reduced availability
of wholesale market funding and forthcoming regulatory changes; and,
(iv) the weakened creditworthiness of industrial or banking parents.
Moody's will also consider the impact for systemic support to benefit
senior unsecured creditworthiness, which may therefore limit the
magnitude of potential downgrades.
The principal methodology used in these ratings was Moody's Consolidated
Global Bank Rating Methodology published in June 2012. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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.
The ratings have been disclosed to the rated entities or their designated
agent(s) and issued with no amendment resulting from that disclosure.
Information sources used to prepare each of the ratings are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's considers the quality of information available on the rated
entities, obligations or credits satisfactory for the purposes of
issuing these reviews.
Moody's adopts all necessary measures so that the information it
uses in assigning the ratings is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entities or their related third parties within
the two years preceding the credit rating action. Please see the
special report "Ancillary or other permissible services provided
to entities rated by MIS's EU credit rating agencies" on the
ratings disclosure page on our website www.moodys.com for
further information.
Please see the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%)
and for (B) further information regarding certain affiliations that may
exist between directors of MCO and rated entities as well as (C) the names
of entities that hold ratings from MIS that have also publicly reported
to the SEC an ownership interest in MCO of more than 5%.
A member of the board of directors of this rated entity may also be a
member of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating
Process page on www.moodys.com for further information on
the meaning of each rating category and the definition of default and
recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history. The date on
which some ratings were first released goes back to a time before Moody's
ratings were fully digitized and accurate data may not be available.
Consequently, Moody's provides a date that it believes is
the most reliable and accurate based on the information that is available
to it. Please see the ratings disclosure page on our website www.moodys.com
for further information.
In addition to the information provided below please find on the ratings
tab of the issuer page at www.moodys.com, for each
of the ratings covered, Moody's disclosures on the lead rating
analyst and the Moody's legal entity that has issued each of the
ratings.
The person who approved Banque PSA Finance and its subsidiaries,
RCI Banque and its subsidiaries, Volkswagen Bank GmbH and its subsidiaries
credit ratings is Carola Schuler, MD - Banking, JOURNALISTS:
44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454
The person who approved FGA Capital S.p.A. and its
subsidiaries credit ratings, is Johannes Wassenberg, MD -
Banking, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS:
44 20 7772 5454
Andrea Usai
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
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 Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's reviews ratings of four European captive auto finance institutions
