Frankfurt: Standard & Poor’s (S&P), the global rating agency, has revised its outlook on German carmaker Volkswagen AG (VW) to negative from stable. Similarly the outlooks on VW’s related entities, including Volkswagen Financial Services AG (VW FS) and Volkswagen Bank GmbH (VW Bank), were also revised to negative from stable.

However S&P affirmed the A+ long-term and A-1 short-term credit ratings on VW and related entities. “VW’s profitability and free cash flow generation are expected to be relatively weak this year, owing to heavy capital expenditures and product launch costs related to new models,” says credit analyst Maria Bissinger.

“The outlook revision reflects increased concerns that continued intensification of competition across the European automotive industry will hinder a rebound in financial performance beyond 2003,” she adds.

“The outlook changes on VW FS and VW Bank solely reflect the outlook revision on their 100-per cent owner VW, on which the ratings of both are based owing to their status as core subsidiaries,” says credit analyst Harm Semder. “S&P regards VW FS and VW Bank as captive finance companies, which, together with their operating parent company VW, are seen as a single business enterprise.”

VW is the leading European mass-market automotive manufacturer. The group’s 2002 results were broadly in line with expectations, with sales of euro 86.9 billion and an operating profit of euro 4.8 billion (down 12.2 per cent from 2001).

Automotive cash flows from operations remained at a solid level of euro 8.2 billion; however, automotive net liquidity dwindled to euro 459 million at yearend 2002 from euro 2.7 billion at yearend 2001.

VW’s 2003 results are expected to be affected by weak markets, launch costs for new models and the ageing of key models, such as the Golf, which is not expected to contribute significantly to 2003 revenues, and the Passat, which is not up for renewal until 2004.

Unfunded pension liabilities (euro 10.3 billion at yearend 2002) have been, and continue to be, fully factored into S&P’s captive finance adjusted figures. The negative outlook reflects the long-term competitive challenges that VW is facing, as well as the limited leeway available to VW at the current rating level. “If free cash-flow generation and net liquidity do not improve in 2004, the ratings could come under pressure,” adds Bissinger.