Volkswagen ratings cut by S&P may be just first blow

Volkswagen’s credit rating was cut one level yesterday by Standard & Poor’s, which said the German car maker’s cheating on diesel-emissions tests indicates management weaknesses that may lead to a further debt downgrade.

S&P lowered Wolfsburg-based Volkswagen’s rating on long-term debt to A-, the fourth-lowest investment grade, from A, and said that another cut of as much as two notches is possible.

“VW has demonstrated material deficiencies in its management and governance and general risk-management framework,” Alex Herbert, a London-based analyst at S&P, said.

“VW’s internal controls have been shown to be inadequate in preventing or identifying alleged illegal behaviour” and the potential for other violations “represents a significant reputational and financial risk.”

S&P put Volkswagen on watch for a potential downgrade last month following revelations that a line of the car maker’s diesel-powered cars had software installed that was used to fool US emissions testers.

As many as 11m vehicles worldwide may have to be fixed to remove the so-called defeat device. The manufacturer’s debt was upgraded to A in September 2014.

Its top rating from S&P was AA-, the fourth-highest grade, which it received in 1991, according to data compiled by Bloomberg.

Volkswagen has yet to determine the full cost of the scandal. It has set aside €6.5bn for repairs and compensation, but has said that won’t be enough.

Among lawsuits and regulatory penalties, the US could fine it as much as $7.4bn (€6.5bn), Sanford C Bernstein estimates.