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Oct 30 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Russia-based Volkswagen RUS LLC's (VWBR) upcoming issue of fixed-rate rouble-denominated bonds an expected Long-term rating of 'A-(EXP)'. The issue benefits from recourse to VWBR's German parent, Volkswagen Financial Services AG (VWFS AG).
In total, VWBR has registered 13 series of bonds with issue sizes of RUB2bn, RUB3bn or RUB5bn and tenors of five or seven years. Initially, VWBR plans to place an issue of up to RUB5bn.
Proceeds from the issuance will be used solely for VWBR's corporate purposes. Should VWBR fail to make a coupon or principal payment under the terms of the bonds, bondholders will benefit from a public irrevocable offer (PIO) that would allow them to sell the bonds to VWFS AG.
The final rating is contingent on the receipt of final documents conforming to information already provided.
KEY RATING DRIVERS
The bond issue's rating is driven by potential support from VWFS AG, a wholly owned subsidiary of Volkswagen AG (VW AG; A-/Positive), which . VWFS AG will provide the PIO to bondholders to buy back the bonds and cover outstanding coupons in case of default by VWBR. In assigning the ratings, Fitch has not relied on the ability of bondholders to enforce the PIO in a Russian court, in case of need. However, the agency believes that VWFS AG, if required, would have a very strong propensity to honour the obligation due to its publicly expressed commitment to do so, potential reputational damage from not honouring the obligation and the importance of the Russian market for the VW Group.
The bonds are expected to be settled through the MICEX exchange, but in the unlikely scenario that this is not possible, settlement will take place through a paying agent - currently Rosbank (BBB+/Stable), which may be replaced if its credit profile deteriorates - or through the direct purchase of the bonds by VWFS AG.
Although unlikely, the PIO could be terminated under certain conditions that are beyond VWFS AG's control, including impossibility of payments and settlements in Russia, nationalisation of VWBR, war or revolution, and circumstances under which none of the internationally recognised rating agencies assigns a credit rating to the Russian Federation.
Given the exposure of the structure to these quite extreme forms of country risk, Fitch expects thatFitch expects that the ratings of the bonds is will bewill be capped at a level two notches higher than Russia's sovereign ratings (BBB/Stable).
RATING SENSITIVITIES
A weakening of VW AG's and consequently VWFS AG's credit profiles, undermining the latter's ability to pay under the put option, could lead to a downgrade of the bond issue's rating. The rating could also be downgraded as a result of a downgrade of Russia's sovereign ratings.
Upside potential for the bond issue's rating may emerge if both Russia's sovereign ratings are upgraded and VW AG's and VWFS AG's credit profiles strengthen.