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S&P downgrades VW on emissions scandal

David Shepardson
Detroit News Washington Bureau

Washington — German automaker Volkswagen AG had its credit rating lowered by Standard & Poor’s Ratings Services amid growing concerns about the fallout from the company’s cheating on emissions requirements on 11 million vehicles worldwide.

S&P said it was lowering its rating to “A-/A-2” from “A/A-1” on its long- and short-term corporate credit ratings on VW, and said it could drop the rating by another two notches. Moody’s Financial Services and Fitch Ratings have both put VW on notice of a possible downgrade.

VW shares are down 36 percent since the EPA disclosed the cheating on Sept. 18.

“VW continues to face wide-ranging negative credit consequences following its admission that it installed software designed to manipulate diesel engine exhaust emissions in 11 million passenger cars and commercial vehicles and the related global recall of these vehicles,” S&P said. “The downgrade reflects our assessment that VW has demonstrated material deficiencies in its management and governance and general risk management framework. We believe VW’s internal controls have been shown to be inadequate in preventing or identifying alleged illegal behavior in the U.S. and misconduct in other regions.”

S&P also lowered long- and short-term ratings on VW’s debt instruments as well as VW’s “core” subsidiaries, including captive finance entity Volkswagen Financial Services AG and its subsidiary Volkswagen Bank GmbH. Also S&P lowered to “A-” from “A” irs long-term issuer credit and financial strength ratings on captive insurer Volkswagen Insurance Co. Ltd.

S&P said, “VW’s breach of U.S. environmental law and potential other laws outside the U.S. represents a significant reputational and financial risk to VW over the medium term... We recognize, however, that the full facts and consequences of VW’s emissions manipulation may not be known for months, even years. We expect VW to experience a negative impact on its sales volumes, prices, and margins.”

Last week, VW of America said most of the 482,000 diesel cars that used software to evade emissions standards will need a “major fix,” including a hardware upgrade that won’t start for at least another year. It comes as the Environmental Protection Agency is investigating another emissions control device in 2016 diesel VW cars that the automaker had failed to disclose.

The device “senses engine temperature, engine rpms, transmission gear ratio, road speed, manifold vacuum or any other parameter for activating, modulating, delaying or deactivating any part of the emissions control system,” VW said, saying it did not disclose the device in its initial application for certification for the 2016 models.

The EPA’s head of its Office of Transportation and Air Quality, Chris Grundler, told Congress Thursday the agency expects to receive a proposed fix for the newest vehicles as early as this week. He said EPA still doesn’t know why VW cheated and who was responsible. He said VW would have to take steps to offset those excess emissions.

VW has admitted to using software in 11 million 2009-15 vehicles worldwide and has set aside $7.3 billion to pay damages. S&P said VW’s costs could be “well in excess” of that figure. German media outlets reported that VW is seeking cost savings from suppliers as it looks to conserve cash to address the scandal’s costs.

The company’s CEO abruptly resigned and the automaker has suspended several high-ranking officials. The Justice Department, at least 45 states and environmental regulators around the world are investigating and could impose massive fines. The EPA has said VW could face $18 billion in fines.

U.S. law firm Jones Day is conducting an investigation at VW’s request. German prosecutors raided VW offices last week and at least three VW officials have been suspended.

The Senate Finance Committee is investigating VW’s use of tax credits worth about $50 million for the sale of some diesel cars.

The Justice Department is investigating the use of those tax credits and whether VW lied to U.S. regulators.

VW U.S. Chief Michael Horn apologized last week before Congress and agreed that the company has lost the trust of Americans. He disclosed the company has withdrawn its request for approval to sell the 2016 diesel cars. It also has issued a stop-sale on remaining 2015 cars with 2-liter diesel engines.

“We are working with the agencies to continue the certification process,” spokeswoman Jeannine Ginivan said.

DShepardson@detroitnews.com