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RPT-Fitch affirms Volkswagen at 'A-', positive outlook

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May 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Volkswagen AG's Long-term Issuer Default Ratings (IDR) and senior unsecured notes at 'A-' and Short-term IDR at 'F2'. The Outlook on the Long-term IDRs is Positive. Fitch has also affirmed Volkswagen International Finance NV's guaranteed notes at 'A-'.

The rating action is underpinned by the group's relative resilience in the current adverse environment and its comfortable financial headroom in its ratings. Earnings have gradually declined in H212 and Q113 and Fitch expects further erosion through 2013, notably at the group's mass-markets brands, but premium and high-end brands continue to perform well and group profitability is still robust and well in line with the current ratings.

We believe that an upgrade to 'A' remains possible in the next 12 months if the group limits the negative impact of deteriorating market conditions and of cash outflows from acquisitions on its key financial metrics, including group operating margins remaining above 5%, adjusted gross leverage below 1x and cash from operations on adjusted gross debt above 60%, all from industrial operations.

KEY RATING DRIVERS

Above-Average Business Profile

Volkswagen AG's ratings are supported by an unparalleled product portfolio, especially with the full integration of Porsche, broad geographical diversification, leading and increasing market shares and an unrivalled potential for cost savings and economies of scale.

Modular Toolkit Strategy

Fitch expects the new modular transverse matrix (MQB) platform strategy to generate substantial savings in time to market, production, training and ultimately cost. However, it poses the risk of a flaw or quality issue with that platform, which could have major repercussions. Also, Volkswagen will have to carefully manage its brand image to maintain a clear differentiation between brands in spite of common parts.

Further Corporate Activity

Volkswagen is going to conclude a domination and profit & loss transfer agreement with MAN SE. It currently owns 75.03% of MAN and will launch a mandatory offer on MAN's minorities in 2013, which may amount to more than EUR3bn depending on the shares tendered. This transaction will clearly reduce the group's financial buffer and headroom in the Positive Outlook, but should be put in perspective with the group's cash generation and net cash position.

Healthy Though Eroding Margins

Group's operating margin narrowed to 3.8% in Q113 from 6% in 2012 and 7.1% in 2011 - excluding the robust double-digit margins from its Chinese operations reported as joint ventures. However, these margins are deemed solid by Fitch considering the adverse environment and the increase in investments. Fitch expects the aggressive pricing environment in Europe to weigh further on profitability in 2013, but this should be compensated by still strong margins in other regions.

Robust liquidity

Despite eroding profitability and acquisitions, the group maintains a solid net cash position, backed by ample liquidity. At end-Q113, it reported gross cash and equivalents of EUR22.5bn at group level plus EUR14.5bn of short-term securities (including EUR19.4bn and EUR8.0bn, respectively, for the industrial business), compared with EUR17bn of financial debt from industrial activities, including EUR1.2bn current debt.

Below-Peers' Corporate Governance

While this does not have a direct and immediate impact on the ratings, Fitch considers corporate governance to be weaker than at its main peers. In particular, the "Volkswagen Law", which calls for a 20% blocking minority in voting resolutions, is challenged by the European Commission. Other areas of weakness include conflicts of interest by some board members including between Porsche and Volkswagen, and lack of independence and cultural diversity at the supervisory board level.

RATING SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

Operating margins above 4% (industrial) and 5% (group) Adjusted gross leverage below 1x and CFO on adjusted debt above 60%

Negative: Future developments that could lead to negative rating action include: The Outlook could be revised back to Stable in case of further aggressive M&A or accelerated capex investments, in particular if it occurs during a sharp slowdown or if profitability improvement slows more than our current expectations.

A significant deterioration of credit metrics, including operating margins below 2% and 3% (at industrial and group level, respectively), and adjusted industrial gross leverage above 2x on a sustainable basis could lead to further negative rating pressure.