VW Scandal to Hurt Its Financing Arm – Wall Street Journal

Posted: Monday, September 28, 2015

The European Central Bank has suspended purchases of some bonds issued by Volkswagen AG’s financing arm.
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FRANKFURT— Volkswagen AG
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faces higher financing costs and a strain on its ability to offer loans to boost sales amid an unfolding emissions scandal, which is rippling through all aspects of the auto maker’s business.

Volkswagen disclosed last week as many as 11 million diesel cars contained software that U.S. authorities say allowed the company to dodge emissions standards. The cars could now be subject to a global recall. The company already has halted U.S. sales of the diesel-powered cars.

On Sunday, Germany’s motor authority said it would give VW until Oct. 7 to come up with a technological solution to the situation, which concerns engine-management software that made bench-test emissions appear lower than they were on the road.

The German newspaper Bild am Sonntag on Sunday reported that auto-parts supplier Robert Bosch GmbH delivered the software for test purposes and told Volkswagen in a letter in 2007 that the planned use would be illegal. Internal auditors at Volkswagen found the letter, the German newspaper said.

A VW spokesman said the company wouldn’t comment on rumors. Bosch also declined to comment.

Volkswagen’s giant U.S. and European financing operations often act as lenders for car buyers and dealers for any of the brands in the company’s stable, from the namesake VW to Bentley, Lamborghini, Audi, Porsche and others. It bundles banking activities, including deposit taking and consumer lending to spur car sales, as well as leasing and insurance operations.

The unit’s lending and leasing contracts are backed by cars. If the value of the car drops, the financial services unit may have to book a write-down.

Volkswagen Financial Services AG, as it is formally known, is now evaluating whether it has to book charges on the collateral value of cars affected by a recall, a spokesman said. “We’re in talks with Volkswagen to evaluate the potential impact” and aim to produce results next week, he said.

With more than 11,000 employees and assets of around €114 billion ($127.6 billion), the Financial Services unit contributed €781 million or nearly 14% to the group’s overall net profit of €5.66 billion in the first half, according to an analyst presentation. The entire unit had 12.6 million contracts, 15% of which are in North America and 70% in Europe.

The European Central Bank late last week temporarily excluded asset- backed securities originated by Volkswagen AG from its bond buying program to review recent developments, according to a person familiar with the matter. The ECB hopes to complete its review soon, the person said. VW bonds fell last week.

While asset-backed securities are only a fraction of the ECB’s €60 billion ($67 billion) a month bond-buying program, the move underscores the vulnerability the emissions crisis has created for Volkswagen’s financing operations.

It also follows on negative comments from credit-rating firms that could result in a rise in funding costs for VW Financial Services. Moody’s last week downgraded the outlook for the unit to negative from stable, citing “knock-on effects” from the emissions scandal.

Last week Volkswagen issued a profit warning and took a €6.5 billion charge to cover the costs of addressing the matter. The announcement has shaved off roughly 30% of Volkswagen’s market capitalization, and on Friday led to the ouster of Chief Executive Martin Winterkorn.

The new CEO, Matthias Müller, has promised investors and customers a thorough investigation into the emissions cheating scandal. In a letter to employees, which was viewed by The Wall Street Journal, Mr. Müller closed ranks with labor representatives, vowing to ensure that such misconduct “never happens again.”

For their part, Volkswagen drivers are concerned about the resale value of their cars, but analysts expect it will take time to assess the full effect. The diesel cars in question remain safe to drive.

“This announcement impacts the diesel vehicles from Volkswagen and those vehicles carry higher—sometimes significantly higher—residual values than their equivalent gasoline engine counterparts,” said Eric Ibara of Kelley Blue Book, the vehicle-valuation company. “While it is possible that consumers start to shy away from these vehicles, based on past history this is not necessarily what will occur,” he said, citing experience with other car makers.

Write to Eyk Henning at eyk.henning@wsj.com and Brian Blackstone at brian.blackstone@wsj.com

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