In this report, we deconstruct the recent changes in Volkswagen’s corporate structure and analyse how this alters the relative credit strength of each entity.
Key Changes to Volkswagen’s Corporate Structure:
From 1st July 2024, Volkswagen has completed the reshuffling of its captive finance entities which has resulted in the creation of a European and UK dedicated financial services arm, that will be regulated by the ECB and can use customer deposits from VW Bank to fund its growth.
We believe that the key implications for bondholders are as follows:
- Volkswagen Financial Services VWFS (remainco) will be renamed Volkswagen Finance Services Overseas AG (holding company of all non-European financial services activities).
- ‘Volkswagen Financial Services AG’ will be created (newco) which will house European financial services activities (incl. UK) and will be supervised by the ECB.
- VW Bank GmbH will move under Newco and VW Leasing GmbH will become a subsidiary of VW Bank. VW Bank GmbH will be a 100% affiliate of the European financial arm.
- Existing profit and loss agreement between VW AG and remainco will be extended to include the newco
- VW Leasing’s LT rating has been upgraded to A1 from A3 by Moody’s (but no change from S&P BBB+)
- VW leasing will no longer be an active issuer going forward and all EUR bonds will be issued by either the Newco or VW Bank (most likely VW Bank).
Ranking Volkswagen’s Issuing Entities:
Our research, which is based on individual issuer fundamentals and bond technicals, indicates that newly issued bonds (see slide 22) constitutes the most accurate reflection of relative credit strength between the entities.
VW Leasing trades in-line with VIF & VGAF, whilst VFS AG trades slightly outside of these three entities (due to its structural subordination) whilst VW Bank’s snr non pref. issues trade widest (because of the lower ratings and seniority of its snr non pref. vs. snr unsecured issues of other entities).
All entities aside from VW Bank benefitted from the CSPP program, so as the program unwinds we would expect their spreads to widen towards VW Bank.
The newly issued VWFS AG trades wider vs. its previous curve (green VW 3 7/8 ‘30 issued in 2024 trades +15bps wider to VW 0 3/8 ‘30 issued in 2021) which we view as a fairer level given the structural subordination of the entity vs. VW Leasing and the rolling off of the CSPP program.
Further, we believe that any new senior unsecured issues from VW Bank (not applicable to snr non pref.) should trade in-line with the industrial entities (as we see for VW Leasing currently) given its strong fundamental profile.