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Volkswagen Credit Spreads Surge Anew Amid Emissions Scandal, Shake-Up Talk

Volkswagen (VW) bond and CDS spreads gapped wider again into the Tuesday morning session, after the company detailed initial cost estimates related to its emissions scandal, and as press reports suggested the company was eyeing a potential top-level management shakeup.

Five-year CDS referencing VW debt swelled another 60% today after rising 80% yesterday, according to data provider Markit. The spread level reached the 215 bps area, up from 133 bps at yesterday’s closing bell, and 75 bps ahead of the announcement of charges leveled by the U.S. Environmental Protection Agency on Friday. VW protection costs have not been this high since the recession-era days of 2009, trade data show.

Meantime, VW 2.4% notes due May 22, 2020 changed hands this morning at T+245, or 155 bps wider week to week, according to MarketAxess. The notes date to issuance on May 19 at T+83, as part of a $2.8 billion, four-part offering on the heels of a Moody’s upgrade in March, to A2, and an S&P upgrade last September, to A.

VW carried stable outlooks across the three main ratings agencies into this week. As reported, Fitch yesterday said that its A rating and stable outlook on VW could be pressured by the emerging “crisis.” But its first-blush assessment of the scandal was that an immediate downgrade was “unlikely,” as VW’s maximum fine exposure – $18 billion, according to press reports – and recall costs could be offset by projections for roughly €5 billion per year in free cash flow in 2016 and 2017, and €5-5.5 billion of proceeds from the sales of its stakes in Lease Plan and Suzuki.

VW disclosed yesterday that it planned to set aside a roughly €6.5 billion provision, “to cover the necessary service measures and other efforts to win back the trust of our customers,” but noted that the size of the provision “may be subject to revaluation” as the investigations continue, with attendant implications for fiscal third-quarter results.

"We at Volkswagen will do everything that must be done in order to re-establish the trust that so many people have placed in us, and we will do everything necessary in order to reverse the damage this has caused," VW CEO Martin Winterkorn said on Sept. 20 in a statement. – John Atkins

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