Friday 9 December 2016

Second-hand Volkswagen cars may lose value following emissions scandal

Matt Scully

Published 04/10/2015 | 02:30

In Ireland, up to 80,000 Volkswagen cars will be recalled in an 'action plan to correct the emissions characteristics of certain diesel vehicles'
In Ireland, up to 80,000 Volkswagen cars will be recalled in an 'action plan to correct the emissions characteristics of certain diesel vehicles'

A reduction in car values on Volkswagen AG models after its emissions scandal is the biggest risk to its bonds tied to auto loans, leases and dealerships worldwide, credit-rating companies said last week.

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In Ireland, up to 80,000 Volkswagen cars will be recalled in an "action plan to correct the emissions characteristics of certain diesel vehicles".

The recall will involve 34,387 Volkswagen passenger cars, 16,485 Audi cars, 4,365 SEAT cars, and 16,004 Skoda cars.

The revelation of faked pollution controls is credit negative for the company's asset-backed securities, Moody's Investors Service said last week. A chief concern would be linked to declines in the auto maker's used-car values.

"The full impact on car prices remains uncertain," Fitch ratings analyst Andreas Wilgen said in an announcement last Tuesday.

A recall may affect 11m vehicles around the world, according to Volkswagen. Moody's changed its outlook on VW's A2 issuer rating to 'negative' from 'stable' last week. Used-car prices help determine how much lenders and lessors might be able to recover if a customer defaults and the vehicle is repossessed and resold.

"There will likely be collateral value declines beyond normal depreciation, affecting liquidation loss severities if defaults increase," said Chris Sullivan, of United Nations Federal Credit Union. The likelihood that defaults meaningfully rise is unlikely, he said. "The underlying credit of these securities should continue to perform," he said. "There is no incentive for the borrowers, who are generally of high quality, to default."

Wall Street bond specialists also believe default risks are low on asset-backed securities specifically dependent on consumer loan repayments. In the most popular bond series sold by Volkswagen, called Valet, annual default rates averaged about 1pc, according to Wells Fargo.

Rating companies reiterated that risks in the US market are on the smaller segment of dealership- financing bonds, where repayments on principal could fall to 40pc of the outstanding balance, at least in the short-term, Moody's said.

Slow prepayment speeds could trigger early pay-offs to investors, depriving them of expected interest payments. VW has around $5.6bn (€4.96bn) in ABS outstanding.

Securities sold in Europe present an elevated degree of risk, Moody's said, as diesel-engine vehicles are more popular and the risk of borrowers selling back their cars at the end of their loan terms could flood the used-car market with unsalable models. Volkswagen, however, has indicated that it will support dealers financially, according to Moody's.

"Other manufacturers", such as Toyota and GM "also experienced recalls, though not of this nature, and saw their sales come back relatively soon," said Sullivan. Any weakening in bond prices "might only encourage value-seekers."

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