According to US Environmental Protection Agency (EPA) it is discovered that the larger diesel engines in cars of mark Volkswagen, Audi and Porsche are equipped with software that cheating with emission data.This should be about 3-liter diesel engines in some vehicle models from 2014 to 2016.EPA has submitted a letter of findings to the respective automakers.
By Bernhard Held, Yasmina Serghini-Douvin and Carola Schuler, Moodys Investor Service
Downward Price Pressure on Used Diesel Cars Will Affect Volkswagen AG the Most, With Affiliates Bearing Some Residual Value Risks The fallout from Volkswagen AG ‘s (VW, A2 negative) emission standards violation may notonly put pressure on future car sales, but could also affect the resale prices of its used diesel vehicles.However, figures from the US -based on a very preliminary assessment — show a drop of 13% for used VW diesel vehicles in September,This development may in turn weigh on the carmaker’s financial flexibility as we expect that it will shoulder some of the burden of this commonly referred to residual value (RV) risk with the various parties involved in selling, financing and renting VW diesel cars. Accordingly, the company will most likely have to increase provisions and / or book impairment losses. The RV risk emanates from loan and leasingtransactions with private car buyers, aswell as from buy-back agreements with business customers, such as leasing and car rental
firms.
Broadly Risk Splity
VW contractually splits these risks broadly between the customer, its dealer network, and itself (including the captive finance operations) in its transactions with not only corporate buyers, including rental firms and non-captive leasing companies, but also when it sells financing and leasing products to private customers through its captive finance subsidiaries. Moreover, for certain asset backed securitisation (ABS), the risk of used car price declines is transferred to ABS investors. As a result, VW has externalised parts of the residual value risks inherent to its business through ABS deals. However, in the context of the expected recall of up to 11 million vehicles worldwide, we expect that the company will not only abide by its contractual buy-back agreements, but also pro-actively protect the functioning and readiness of its key vehicle distribution and fundingchannels.
Therefore, our central scenario is for VW to use its financial strength to contain any economic damage incurred by its diverse business partners as well as protect the franchise and its brands should the resale value of the affected diesel cars fall. VW set a precedent during the 2008-09 economic crisis in Europe when it supported dealers. We expect that the most integral parts of VW’s key distribution channels, its dealerships and its captive finance subsidiaries will be the
main beneficiaries from any compensation measures. In this report, we examine the contingencies to which VW and its various affiliated stakeholders remain contractually exposed after the sale of a car. In particular, we highlight that the risk of falling car prices remains effectively with the carmaker or its dealer network. Furthermore, we outline the extent to which investors in securitization deals are exposed to used-car market values. In Exhibit 1, we illustrate the contractual and systemic interdependencies between VW, its major sales channels and the different finance intermediaries and vehicles.
Pre-AgreedPurchase
Because the accounting treatment of RV risk (i.e. the risk of a larger-than-anticipated fall in the price for the leased asset / loan collateral between a contract’s conclusion and a pre-agreed repurchase) and the associated provisioning decisions relate first and
foremost to direct, contractual obligations, we consider it likely that the carmaker will have to increase its provisions to cover additional costs or record impairment losses. It is currently too early to quantify the size of these provisions and/or impairment losses as the medium- to long-term price effects on VW’s diesel vehicles cannot be reliably assessed at this juncture.We have not seen any evidence of a major price downturn in Europe, which accounts for VW’s largest exposure with 8.5 million affected diesel cars. However, figures from the US — based on a very preliminary assessment — show a drop of 13% for used VW diesel vehicles in September, when news of the emissions violations first emerged. On the other hand, the recall-related repairs which VW plansto carry out on the affected diesel engine vehicles are likely to offsetsome or all of this decline, writes Bernhard Held, Yasmina Serghini-Douvin and Carola Schuler in this article.
