DBRS Confirms Volkswagen at A (low)

DBRS has today confirmed the Issuer Rating of Volkswagen AG (VW or the Company) at A (low) with a Stable trend, reflecting the Company’s strong business and financial profiles.

In 2006 and through the first half of 2007, VW has continued a significant recovery from relatively poor 2005 results. Total vehicle sales increased by 10% in 2006 to 5.7 million vehicles with the Company on pace to reach record sales of 6 million units this year. VW maintains a leading market share of 19.1% in Western Europe (including a 32.6% share in its native German market). In China, after announcing its Olympic Restructuring program in 2005, the Company increased sales by 24% in 2006 to 709 thousand units and has stabilized market share at approximately 17%.

VW’s profitability has also improved as the Company continues its ForMotionplus program. Operating margins in 2006 increased to 4.2%, below industry leaders, but well in-line with other European-based original equipment manufacturers (OEMs). In October 2006, the Company signed a new labour agreement covering its six primary production sites in Germany (VW’s main production region representing approximately 34% of aggregate production). Total workweek hours increased to 34 hours (from 29 hours) without a direct pay increase, making the Company’s labour costs more in line with industry standards. In 2007, the Company plans to increase productivity further through a targeted 10% reduction in material costs.

VW is still awaiting a resolution around the potential consolidation of the European commercial vehicle industry. In the first quarter of 2007, the Company increased its stakes in Man AG (MAN) and Scania AB (Scania) to 29.9% and 20.01%, respectively, with the aim of eventually combining these businesses with its Brazilian trucking operations to better penetrate emerging markets.

In North America, despite a slight gain in market share, VW continues to face challenging market conditions as it incurred further losses in 2006. The Company will launch several new models in 2007 and 2008 including initial entries into important market segments such as minivans and compact utility vehicles (CUVs). This notwithstanding, a return to profitability in the near term remains unlikely given the continued relative weakness of the U.S. dollar.

VW’s financial profile, however, remains strong as it further increased its net cash position (industrial operations) to over €11 billion as of June 30, 2007, with liquidity being ample given well-diversified funding sources and low utilization.

The Company faces potential changes in its corporate governance, with the Volkswagen Law (restricting shareholder voting rights to a maximum of 20%) expected to be abolished in the fall of 2007 and Porsche AG (Porsche) increasing its stake in VW to 30.9%. However, in the interim, DBRS notes that the Company’s Supervisory Board has a commission to ensure that all VW-Porsche matters be handled on an arm’s length basis.

Over the near-to medium-term, DBRS expects the Company’s credit profile to remain constant, although a sustained return to profitability in the North American market would have positive rating implications

Apart from current weakness in the North American trucking market (due to extensive pre-buying in 2006 given increasing emissions regulations effective in 2007), prospects in all of the Company’s business segments are positive over the near- to medium-term, providing further support for the ratings.

Notes:
All figures are in euros unless otherwise noted.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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