(The following statement was released by the ratings agency)
NEW YORK, March 24 - Standard & Poor's Ratings Services said today it revised its outlook on Germany-based carmaker Volkswagen AG (VW) to negative from stable. The outlooks on VW's related entities, including Volkswagen Financial Services AG (VW FS) and Volkswagen Bank GmbH (VW Bank), were also revised to negative from stable.
At the same time, Standard & Poor's affirmed the 'A+' long-term and 'A-1' short-term credit ratings on VW and related entities.
"VW's profitability and free cash flow generation are expected to be relatively weak this year, owing to heavy capital expenditures and product launch costs related to new models," said Standard & Poor's credit analyst Maria Bissinger. "The outlook revision reflects increased concerns that continued intensification of competition across the European automotive industry will hinder a rebound in financial performance beyond 2003."
"The outlook changes on VW FS and VW Bank solely reflect the outlook revision on their 100% owner VW, on which the ratings of both are based owing to their status as core subsidiaries," said Standard & Poor's credit analyst Harm Semder. "Standard & Poor's regards VW FS and VW Bank as captive finance companies, which, together with their operating parent company VW, are seen as a single business enterprise."
VW is the leading European mass-market automotive manufacturer. The group's 2002 results were broadly in line with expectations, with sales of EUR86.9 billion and an operating profit of EUR4.8 billion (down 12.2% from 2001). Automotive cash flows from operations remained at a solid level of EUR8.2 billion; however, automotive net liquidity dwindled to EUR459 million at year-end 2002 from EUR2.7 billion at year-end 2001.
VW's 2003 results are expected to be affected by weak markets, launch costs for new models and the aging of key models, such as the Golf, which is not expected to contribute significantly to 2003 revenues, and the Passat, which is not up for renewal until 2004.
Unfunded pension liabilities (EUR10.3 billion at year-end 2002) have been, and continue to be, fully factored into Standard & Poor's captive finance adjusted figures.
The negative outlook reflects the long-term competitive challenges that VW is facing, as well as the limited leeway available to VW at the current rating level. "If free cash flow generation and net liquidity do not improve in 2004, the ratings could come under pressure," added Ms. Bissinger.
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