Volkswagen loses brand value, gets Euro 3.6-bn ‘free’ capital

Volkswagen’s core autos division will likely plunge into a loss this year as it is set to shoulder the bulk of the costs from the fallout of the company’s rigging of diesel emissions tests, two company sources said on Friday.Volkswagen’s namesake brand accounts for about 5 million of the up to 11 million diesel vehicles worldwide that need to be refitted because they could carry software designed to manipulate emissions tests.

Europe’s largest automaker is setting aside Euro 6.5 billion ($7.4 billion) in the third quarter to cover servicing and marketing outlays related to the scandal. One source said the bulk of those costs would be booked to the main brand’s accounts.

German magazine Der Spiegel reported the possible loss at Volkswagen’s largest autos division by sales and revenue earlier on Friday. Volkswagen declined to comment.Hamburg-based M M Warburg analyst Marc-Rene Tonn said it was still unclear whether Volkswagen would allocate the Euro 6.5 billion to brand or group accounts.

Third-quarter group results, due to be published on October 28, will also reflect Euro 500 million of costs for restructuring in Brazil and Russia as well as Euro 1.4 billion in gains from Volkswagen’s sale of shares in Suzuki, Tonn said.

Volkswagen’s namesake brand contributed Euro 1.43 billion or 21 per cent of the group’s Euro 6.82 billion half-year profit, which included strong performances from premium brands Audi and Porsche.

‘Free’ capital

Volkswagen will also have a Euro 3.7-billion ($4.2 billion) bond maturing next month – but the debt’s structure means it won’t add to the crisis-stricken automaker’s financial headaches.Holders of the securities due on November 9 will be paid in Volkswagen shares instead of cash as the securities must be converted into equity. With the company’s shares hammered by an emissions- rigging scandal, investors may receive assets worth less than the original cost of the bonds.

The payment in stock instead of cash will come as relief to Volkswagen as it faces a multi-billion dollar legal bill after admitting last month to fixing emissions tests in 11 million of its diesel-engine cars. The company lost as much as $33 billion in market value after the scandal broke and Warburg Research estimates damage to its sales and reputation may cost Euro 35 billion.

“It’s like a ‘free’ capital increase,” said Jonathan Stanford, a Lugano, Switzerland-based fund manager at a unit of GAM Holding, which manages 124 billion francs ($128 billion). This is “bringing the company a welcome, albeit small, relief. The risk is that you might end up with a lot of stock that is not worth very much.”

Chief Executive Officer Matthias Mueller said this week Volkswagenwill delay or cancel non-essential projects to slash spending.

The convertible bonds, which were issued in 2012, were quoted at 73 cents on the euro on Thursday, from 100.8 cents on September 17 a day before the scandal erupted, according to data compiled by Bloomberg. The conditions of the debt remain unchanged, Claus-Peter Tiemann, a spokesman for the automaker, said by phone on Wednesday.

Volkswagen shares tumbled to a four-year low of Euro 92.36 after the scandal broke and were trading at Euro 106 on Friday. The spread between common and preferred stock widened the most since January 2009 with the common shares gaining as much as 15 per cent on volumes about three times those of the daily average for the past three months.

If the company’s shares were to stay at current levels, owners of the bonds would suffer losses, said Brice Perin, a Paris-based fund manager at Generali Investments Europe SpA, which has Euro 380 billion of funds under management.

Mandatory convertibles are commonly bought by hedge funds, which reduce the risk by short-selling the underlying stock, GAM’s Stanford said Thursday. Holders also benefit from high coupons the securities pay, he said.

The conversion may have an impact on some of VW’s investors, said Simon Oehri, a portfolio manager at LLB Asset Management, which holds some of the maturing bonds.

“The Volkswagen brand as well as its access to the bond market are hurt,” said Vaduz, Liechtenstein-based Oehri. “Future convertible or straight bond issues will be very deeply analyzed by the market.”

Spanish investment

The company has guaranteed a Euro 4.2-billion ($4.8 billion) investment in Spain, Industry Minister Jose Manuel Soria said on Friday. “Yesterday I had a meeting in Germany with the chairman and he guaranteed the investments planned for Spain would be maintained,” Soria told La COPE national radio.

Volkswagen pledged the multi-billion euro investment over five years for the SEAT brand factory in Martorell outside Barcelona – Spain’s biggest car plant – and the Volkswagen brand factory in Navarra.

Volkswagen is an important employer in Spain, representing around 22,000 jobs. Spanish assembly plants are winning new models and creating jobs in a country with one of the highest unemployment rates amongst developed countries.

Unemployment will be a major theme in general elections on December 20 where the ruling centre-right People’s Party is fighting for re-election in a closely-run contest with the opposition Socialists and newcomer parties.

Spain has no domestically-owned car makers – Volkswagen bought SEAT from the state in 1986 – but the overall industry accounts for almost 10 per cent of economic output and employs around 9 per cent of the workforce.

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