Volkswagen Seeking $21.5 Billion in Financing for Dieselgate
In case you are one of the few people who like cars and yet have missed all of the news for the past month or so, things are not going well for the folks at Volkswagen. The diesel scandal that has been the talk of the town since it broke in September, known as Dieselgate, continues to make headlines; most recently, it was revealed that cars beyond the Volkswagen badge were affected. This helps contribute to the massive 11 million-vehicle recall that Volkswagen is facing. Suffice it to say that the top brass in Stuttgart is likely saying, “wir in großen Schwierigkeiten sind!” That’s “we are in big trouble,” for we Anglophones.
Recently Bloomberg reported that Volkswagen is trying to prepare its financial portfolio for the impending costs related Dieselgate. These costs include outreach to owners, development of a fix for the cars that are out of compliance, payments to owners, and possible fines. This could amount to a Dr. Evil-like $21.5 billion in short-term bridge financing, according to two individuals who are familiar with the situation.
This is in addition to the $7.3 billion that Volkswagen set aside in September. While this might seem like an obscene amount of money, it’s actually fairly appropriate for a situation like this: On a per car basis, it’s slightly more than $2,600. Given that Volkswagen has already offered a payment of $500 dollars to all affected owners, plus another $500 card that can be used at Audi and Volkswagen dealerships, that $2,600 per car is starting to dry up fairly quickly.
In an odd quirk to our financial system, it makes more sense for Volkswagen to pursue this financing now even if it doesn’t need it yet. My brother-in-law once told me, “Getting a job is a lot like getting a girlfriend. It’s easier if you already have one.” Financing operates in a similar way. Despite posting a loss in the third quarter of 2015, Volkswagen still has a reasonable financial position. That has a good potential to change in the near future when the bills for Dieselgate start to roll in. If that happens, financing will become more difficult. According to Sascha Gommel, a Frankfurt-based analyst for Commerzbank AG:
In order to protect their rating, they need to show that liquidity will never become an issue for them, because then you have a vicious circle. If the ratings agencies think you won’t have cash and they downgrade you, then your funding gets more expensive.
Adding any further expense is certainly something Volkswagen is working to avoid at all costs. As we reported, the carmaker is planning on cutting its R&D budget by $1 billion and working with suppliers to cut a further $3.41 billion from supply chain costs — all this while developing an ambitious plan to pivot so that they can remain a leader in the environmentally-friendly car world. Volkswagen will continue to invest in diesel vehicles, albeit while using Selective Catalytic Reduction (SCR) and AdBlue to control emissions, but its main focus will be on developing its electric offerings, such as the plug-in hybrid Tiguan GTE shown below.
It is unclear whether or not the Volkswagen Group will recover fully. The stock is at its lowest value in five years, and is at roughly the same price that it was before the Great Recession of 2008. Owners are angry. The brand has lost a lot of the value that it carried for being high-quality, fun, and environmentally-friendly. It’s going to be a long road for Volkswagen (and its other brands: Audi, Bentley, Bugatti, Lamborghini, Porsche, and overseas-brands SEAT and Skoda) as it trys to recover from the loss of trust and financial impact of Dieselgate. New CEO Matthias Mueller seems to have a plan and appears confident that buyers will find their way back to the car of the people. Leichter gesagt als getan, Mr. Mueller. Easier said than done.
Like classics? It’s always Throwback Thursday somewhere.