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Volkswagen scandal: Here's why VW Finance's rating in India may not take a hit

Volkswagen has admitted to fitting nearly 11 million diesel-powered cars worldwide with a device that help the cars cheat on emission tests.

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The recent Volkswagen emission scandal is unlikely to deteriorate Volkswagen Financial Private Limited's (VWFPL) rating in India, an India-Ratings report has said.

Volkswagen has found itself in a soup after the US Environmental Protection Agency (US EPA) revealed that the carmaker had fit millions of its diesel engine-powered cars with a device called 'defect device' which would let the cars cheat on emission tests. In a rapidly unfurling episode, Volkswagen then admitted to the offence, and said that nearly 11 million cars worldwide were fitted with this device.

In India, while Volkswagen India chose to remain mum on the matter, the government has, on Friday, asked the Automotive Research Association of India (ARAI) to launch a probe into the matter.

VWFPL in India comes under Volkswagen Finance Services AG, which also drives its long-term ratings. 

The report says that Volkswagen Finance Private Limited's rating is at 'IND AAA'/Stable, which means that “Volkswagen Finance Services AG's (VWFSAG) ability to extend support to Volkswagen Finance Private Limited (VWFPL) is unlikely to be deteriorated,” the report says.

The In-Ra report says that VWFPL's rating will only change if there is a significant downgrade of Volkswagen or there's a decline in its ownership or support from Volkswagen or VWFSAG. Fitch Ratings Ltd has placed Volkswagen’s ratings (Issuer Default Rating: ‘A’) on Rating Watch Negative on 23 September 2015.

Here's why Volkswagen Financial Private Limited's ratings may not be vulnerable to the scandal in the US.

While the carmaker's reputation and brand image are likely to take a huge hit with regulators and customers, the effect might be capped due to a number of reasons.

First, VW's finance structure and cash flow are robust; second, US accounts for only 6% of the total group sales. Moreover, VWFPL's parent company has limited financial exposure to the US market.

Volkswagen Finance in India is closely integrated with the parent company for the planning and execution of business strategies for the Indian market. The report says that VWFSAG has no financing exposure to the US market, and its Indian operations (VWFPL accounts for less than 1% of VWFSAG's global operations) are not likely to be impacted, the report says.

The report says that Ind-Ra believes the parent company is committed to inject capital as and when necessary. 

List of VWFPL’s outstanding ratings:
Long-Term Issuer Rating: ‘IND AAA’; Outlook Stable
Short-Term Issuer Rating: ‘IND A1+’
Rs 7 billion long-term bank loan rating: ‘IND AAA’
Rs 8 billion short-term bank loan rating: ‘IND A1+’
Rs 30 billion commercial paper programme: ‘IND A1+’
Rs 20 billion secured non-convertible debentures: ‘IND AAA’
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