London, 19 October 2012 -- Moody's Investors Service has today announced rating actions affecting four European auto captive finance groups. These actions reflect, to varying degrees, the combined pressures from (1) the general adverse impact of the deterioration in macroeconomic conditions in Europe, in particular on the auto manufacturing industry; (2) concentrated exposures to car dealers, which are highly correlated with the manufacturers; (3) high reliance on market funding, which can be subject to sudden changes in investor confidence; and (4) some reliance on bank credit lines, the availability and terms of which could be compromised by funding pressure on the banking industry and the prospect of regulatory changes.
Moody's has therefore today placed on review for downgrade:
- the C-/baa2 standalone Bank Financial Strength Rating (BFSR) and standalone credit assessment and the Baa2/Prime-2 debt and deposit ratings of RCI Banque and its subsidiaries;
- the Baa3 long-term issuer rating of FGA Capital; and,
- the C-/baa1 standalone BFSR and standalone credit assessment of Volkswagen Bank GmbH, whilst at the same time affirming the bank's A3/Prime-2 senior unsecured debt ratings and its positive outlook.
Moody's has also:
- maintained the review for downgrade on all ratings of Banque PSA Finance and its subsidiaries; and,
- affirmed the A3 unsecured debt rating of Volkswagen Financial Services AG; outlook positive.
European auto captive financial institutions support the sales of their industrial parents by offering auto loans and related services to retail and corporate customers, as well as loans to car dealers to help them finance their inventories. Their ratings are constrained by their lack of business diversification, large exposures to car dealers, and in some cases by their inherent linkages with their lower-rated industrial parents. On the funding side, these firms are dependant, to varying degrees, on access to senior unsecured and asset-backed securitisation markets as well as credit lines provided by larger banks. Indeed, these are characteristics more commonly associated with speculative grade ratings, as shown by the rating levels of certain other non-bank auto finance companies with similar business models.
However, Moody's notes that most of these firms have banking licenses, and for this reason they are subject to the same regulatory standards as other credit institutions and to ongoing supervision, which afford a certain level of protection to creditors, as well as offering access to central bank facilities. In addition, rated European auto captive firms currently display some healthy credit features, including good capitalization levels, sound profitability and a greater degree of asset and liability matching than traditional retail and commercial banks.
The key drivers for today's review are:
(1) DETERIORATING MACRO FUNDAMENTALS
Moody's expects auto captive banks to be negatively affected by the anticipated difficult economic conditions in Europe, as is the case for European banks more generally. In particular, Moody's expects this environment to impact the European auto industry, which will likely experience sluggish demand in 2013, and forecasts that western European light vehicle demand will contract in 2013 by 3% (for further details, see Moody's report "Global Automotive Manufacturers: Sluggish European Demand Continues To Weigh On Global Auto Sales Growth", published on 17 September 2012).
These factors will together result in lower activity levels for auto finance banks, although Moody's recognizes that the impact of lower car sales could be mitigated in the short-term by an increased proportion of vehicles financed (a higher penetration rate) and/or some cost flexibility. In addition, the poor economic backdrop will likely result in weakening asset quality and therefore higher provisioning costs, although there has been limited deterioration to date. Together with higher funding costs, Moody's expects this to weigh on profitability.
In some cases, ratings on captive auto banks could be constrained by the creditworthiness of their lower-rated manufacturing parents due to the intrinsic strategic, commercial and financial links between them.
(2) CONCENTRATED EXPOSURES TO CAR DEALERS
European auto captive banks lend to car dealers in order to finance their inventories, the soundness of which is highly correlated with the performance of the auto sector, in Moody's view. Although these portfolios are spread across many borrowers and are normally collateralized by vehicles, Moody's considers that these exposures, accounting for about a quarter of the banks' loan portfolios and multiples of their Tier 1 capital, represent a substantial aggregate risk due to this inherent correlation. In addition, Moody's believes that the value of the vehicles, representing the collateral against car dealer exposures, may decline in case of default of the parents. Given the headwinds faced by the auto industry, Moody's believes that these concentration risks may not be adequately reflected in current ratings.
(3) HIGH RELIANCE ON MARKET FUNDING
Most of the European auto captive institutions are almost entirely reliant on wholesale-funding, which can be subject to sudden changes in investor confidence. This may ultimately result in restricted market access and increased funding costs. These firms aim to match the maturity profile of their liabilities with that of their assets, limiting maturity transformation and therefore reducing refinancing risk. However, restricted market access could lead to reduced funding duration, which could constrain loan origination, affecting the strength of the auto captive firms' franchises and ultimately reducing their earnings generation.
(4) RELIANCE ON BANKS' CREDIT LINES
Funding and liquidity reserves at these firms are, to varying degrees, dependant on (i) funding arrangements with their parents, and (ii) credit facilities provided by other banks. Moody's believes that current conditions for European banks -- notably deleveraging efforts -- could reduce their continued willingness to extend such credit lines. Moreover, the forthcoming Basel III regulatory changes to the treatment of interbank credit facilities will reduce the incentive to provide these lines on current terms. This could potentially result in changes to the availability and pricing of funding for auto captive firms.
BANK SPECIFIC RATING CONSIDERATIONS
Banque PSA Finance (BPF)
BPF's D+/baa3 BFSR and standalone credit assessment, Baa3 long-term debt and deposit rating, Prime-3 short-term debt and deposit rating, and provisional (P)Ba1 and (P)Ba2 subordinated and junior subordinated debt programmes remain under review for downgrade. This follows Moody's announcement of 10 October 2012 that BPF would remain under review for downgrade to consider the impact of the downgrade to Ba3 of its parent (Peugeot S.A.; PSA, Ba3/Negative), including any actions which the bank might take to reduce its correlation with PSA, or otherwise to protect its own creditworthiness. The review will also consider the impact of the support that BPF could receive from both its partner banks and the French government, according to an interview given by the French Finance Minister published on 18 October 2012.
BPF's long-term ratings reflect the bank's fundamentals including Moody's view that BPF's creditworthiness is inherently linked to that of PSA, given the intricate strategic, commercial and financial ties to its parent. These credit linkages with PSA include (i) BPF's dependence on PSA for its own business and franchise value; (ii) the potential, therefore, for adverse developments at PSA to impact BPF's funding capacity; (iii) the ability of PSA to require BPF to pay exceptional dividends (Moody's notes that a EUR360 million exceptional dividend was paid in 2012); (iv) BPF's credit exposures to PSA's car dealer networks; and, (v) the risk associated with a possible decline in the value of the vehicles, representing the collateral against BPF's loan book, that could materialize in case of default of PSA. On the other hand, Moody's recognizes that BPF's financial performance has so far shown little correlation with that of the car manufacturer, and that its credit profile is otherwise healthier, considering the bank's good capitalization and profitability track record, and its policy of maintaining a positive liquidity gap.
BPF is a strategic service provider for its parent, as it financed 28.1% of new PSA registrations in the first half of 2012. The institution has a banking license and is therefore supervised by the French banking supervisory authority. BPF claims it has a match-funded profile, and therefore little refinancing risk. The bank has stated in its H1 2012 financial report, that it could secure its commercial business activity for the following 12 months at least without having recourse to unsecured public funding markets, by increasing its securitization programmes and using its c.EUR8 billion worth of undrawn committed credit facilities. However, as noted above, Moody's believes that forthcoming Basel III regulatory changes to the treatment of interbank credit facilities will reduce the incentive to provide these lines on current terms. This could potentially result in changes to the availability and pricing of funding for BPF.
Moody's has also maintained its review on the Baa3 backed senior unsecured rating of Peugeot Finance International NV, and on the Prime-3 backed commercial paper rating of SOFIRA SNC.
RCI Banque's C- BFSR and baa2 standalone credit assessment, the Baa2 long-term debt and deposit rating, the Baa3 subordinate rating and the Prime-2 short term rating were today placed on review for downgrade. During this review,
Moody's will assess whether the following factors are still compatible with its current Baa2 long-term rating:
(i) the high concentration of RCI Banque to car dealers, corresponding to 26% of its loan book as at end-June 2012; and
(ii) its almost entirely wholesale-funded profile.
RCI Banque is a strategic service provider for its parent, Renault S.A. (Ba1/Stable), financing 34.3% of new Renault and Nissan registrations in the first half of 2012. The institution has a banking license and is therefore supervised by the French banking supervisory authority. RCI Banque claims it has a funding surplus, and therefore little refinancing risk, as it finances its assets with longer-dated liabilities. The bank stated in the H1 2012 Financial Report that it could carry out its commercial business activity for more than twelve months without having recourse to unsecured public funding markets, due to its EUR6.4 billion liquidity reserve. However, in this scenario it would use EUR4.5 billion of its available confirmed lines of credit, which Moody's believes could be subject to changes in availability and pricing in response to forthcoming Basel III regulatory changes, as noted above.
The (P) Baa2 senior unsecured medium-term notes (MTN) rating and Prime-2 short-term rating of RCI Banque's subsidiary DIAC have also been placed on review for downgrade.
FGA Capital S.p.A. (FGA Capital)
FGA Capital's Baa3 issuer rating was today placed on review for downgrade. During this review, Moody's will assess whether the following factors are still compatible with its current Baa3 issuer rating:
(i) the impact of the weakening credit profile of its 50% shareholder, Fiat SpA (Fiat), as demonstrated by its recent credit rating downgrade to Ba3 from Ba2 (see press release "Moody's downgrades Fiat to Ba3; negative outlook", published on 10 October 2012);
(ii) the high concentration of FGA Capital to car dealers, corresponding to 26% of its loan book, as at end-June 2012;
(iii) greater pressure on profitability; and
(iv) its wholesale-funded profile -- albeit partly mitigated by funding support from its 50% shareholder Credit Agricole S.A.(CASA, A2/Negative; D/ba2).
FGA Capital is the captive auto-finance company of its ultimate 50% industrial parent Fiat. It is a 50/50 joint venture between Fiat Group Automobiles Spa (100% owned by Fiat) and Credit Agricole Consumer Finance S.A. (100% owned by CASA). The joint venture agreement can be terminated by both parties after the end of 2014. At end-June 2012, CASA provided 40% of funding (including equity) for this venture. Moody's notes that, despite not being a bank, FGA Capital is a financial institution regulated and supervised by the Bank of Italy under a regime that differs from that for credit institutions. However, in some of the other European jurisdictions in which it operates, it is recognized and regulated as a bank.
The backed Baa3 senior unsecured debt and European medium-term note programme of its subsidiary FGA Capital Ireland P.L.C. have also been placed on review for downgrade.
Volkswagen Bank GmbH (VW Bank)
VW Bank C-/baa1 standalone credit assessment was placed on review for downgrade. At the same time, Moody's affirmed the A3/Prime-2 long-term and short-term debt and deposit rating as well as the Baa1 subordinated debt rating. During the review, Moody's will assess the vulnerability of the bank to the following factors:
(i) risks arising from its high concentration to car dealers, which amounted to 24% of its loan book as at end-June 2012;
(ii) refinancing risk, in the context of its limited dependence on market funding sources such as senior unsecured bonds and asset-backed securities, and the fact that 61% of VW Bank's balance sheet liabilities consisted of retail as well as corporate deposits as of end-June 2012; and
(iii) pressures resulting from Volkswagen's global captive finance activities, mainly conducted by Volkswagen Financial Services AG, which VW Bank provides with a high level of intercompany loans, compared to the bank's capital.
VW Bank's A3 long-term debt and deposit ratings (with positive outlook) incorporate Moody's view of a very high probability of VW Bank receiving support from its ultimate owner Volkswagen AG (VW, A3 positive) in the event of need. This support -- evidenced by a comfort letter from its immediate parent, Volkswagen Financial Services AG (VWFS, A3/Prime-2, positive outlook, the main financial arm of VW) -- results in the long-term ratings of VW Bank being aligned with those of VWFS. The ratings are therefore affirmed at A3/Prime-2 with a positive outlook, a one notch uplift from the bank's current baa1 standalone credit strength.
Volkswagen Financial Services AG (VWFS)
The A3 long-term unsecured debt rating of VWFS was affirmed with a positive outlook. VWFS itself is a highly integrated part of VW AG and benefits from a profit pooling agreement with its ultimate owner VW AG. Therefore, VWFS's rating benefits from a very high level of parental support and thus remains aligned with those of its immediate parent.
WHAT COULD CHANGE RATINGS UP / DOWN
Moody's believes there is little likelihood of any upward rating pressure for any of the firms covered by today's announcement, because of the four main pressure points discussed above. Even in the case of a more favorable operating environment, these institutions' narrow business focus and wholesale funding profiles would nevertheless suggest a standalone rating no higher than the 'baa' category, and indeed display some characteristics more commonly associated with speculative grade ratings, as shown by the rating levels of certain other non-bank auto finance companies with similar business models.
A downgrade of the firms included in the review announced today could be triggered by one, or a combination of the following factors: (i) Moody's view that the current rating levels may not adequately reflect the pressure points stemming from the weakening operating environment; (ii) Moody's view that the current ratings may not adequately reflect the institutions' large exposures to car dealers and that capitalization may be weakened under its portfolio stress assumptions; (iii) the possibility of refinancing challenges in the context of reduced availability of wholesale market funding and forthcoming regulatory changes; and, (iv) the weakened creditworthiness of industrial or banking parents. Moody's will also consider the impact for systemic support to benefit senior unsecured creditworthiness, which may therefore limit the magnitude of potential downgrades.
The principal methodology used in these ratings was Moody's Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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The person who approved Banque PSA Finance and its subsidiaries, RCI Banque and its subsidiaries, Volkswagen Bank GmbH and its subsidiaries credit ratings is Carola Schuler, MD - Banking, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454
The person who approved FGA Capital S.p.A. and its subsidiaries credit ratings, is Johannes Wassenberg, MD - Banking, JOURNALISTS: 44 20 7772 5456, SUBSCRIBERS: 44 20 7772 5454
Andrea Usai Vice President - Senior Analyst Financial Institutions Group Moody'sInvestors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Carola Schuler MD - Banking Financial Institutions Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. One Canada SquareCanary WharfLondon E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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