DBRS Confirms Volkswagen AG at A (low)

DBRS has today confirmed the ratings of Volkswagen AG (VW or the Company), reflecting the Company’s strong business and financial profiles. DBRS currently rates Volkswagen AG’s Issuer rating at A (low).

In 2007 through the first half of 2008, VW continued to post strong financial results. Total vehicle sales increased by 8% in 2007 to 6.2 million vehicles with the Company on pace to reach record sales of more than 6.5 million units this year, with much of the sales growth expected to emanate from Central and Eastern Europe and the Asia-Pacific region. Operating margins in 2007 exceeded 5%, below industry leaders but well in-line with other European-based OEMs. VW maintains a leading market share of 19.5% (annual figure for 2007) in Western Europe (including a 32.7% share in its native German market). Additionally, the Company has continued its recovery in China, with VW appearing to have stabilized market share at approximately 18%. North America, however, remains a loss-generating region, given difficult market conditions and the continued relative weakness of the U.S. dollar. Losses will likely persist in the near term. However, VW hopes to improve its performance in this market over the medium term with the introduction of several new models and the establishment of local production capacity (in the state of Tennessee), which would alleviate the adverse currency effects.

VW is still actively involved with the potential consolidation of the European commercial vehicle industry. The Company recently increased its stake in Scania AB (Scania) from 38.0% to 68.6%. Concurrently, VW also owns 29.9% of Man AG (MAN) and appears to have the objective of eventually combining these businesses with its Brazilian trucking operations to better penetrate emerging markets. DBRS notes that the increased investment in Scania would be funded by the significant net cash position of VW’s industrial operations and, as such, would not materially adversely affect the Company’s financial profile.

Over the near to medium term, DBRS expects the Company’s credit profile to remain constant, with future positive rating implications somewhat undermined by the continuing losses in North America as well as by lacklustre medium term prospects in VW’s key Western European markets. Additionally, future growth in profitability may likely be constrained by increasing raw materials costs, (which have thus far been somewhat mitigated by the Company’s hedging activities).

VW also faces significant changes in its own corporate governance with respect to Porsche AG (Porsche), which currently owns just over 30% of the Company and recently (March 2008) announced its intention to acquire a majority stake. Porsche’s announcement follows the ruling last October of the European Court of Justice that effectively overturned the VW Law, (which capped voting rights at 20% and decreased the blocking minority to 20%, thereby protecting the interests of the state of Lower Saxony, which owns 20% of VW). Porsche ultimately seeks to have the VW Law abrogated in Germany as well. DBRS will continue to monitor the developing ownership situation of the Company. While VW’s significant dividend increase for the 2007 financial year is noted, DBRS does not currently believe that Porsche would initiate a material deviation from the Company’s current financial policy and profile. However, should a marked change in VW’s financial policy become apparent, this would trigger an event-driven revision to the ratings.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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