The Volkswagen diesel emissions scandal is having a striking effect on the value of Volkswagen debt and the cost of insuring against a company default. The company is look at huge fines around the globe for allegedly installing software in its vehicles designed to fool emissions testers. Given that no-one at this point knows where this scandal will end, investors are grappling with the size of the scandal and its potential effect on the Volkswagen balance sheet. It is increasingly likely that the company will be hit with fines in the tens of billions of dollars.
Credit default swap prices on Volkswagen debt has surged higher as investors worry about the credit quality of the company. CDS prices leapt 160bps to 225bps in a few days as the breadth of the scandal became known. The CDS price is the annual premium buyers pay to insure against a company credit default. Typically it is for a 5 year period.
Yields on company bonds have blown out by around 173bps with the Volkswagen Australia 4.00% November 2019 bond now yielding around 4.95%. The company sold $250m of these bonds to investors in August 2015 at a yield of around 3.32% or Swap + 93bps.
While the scandal is so far limited to Volkswagen, the debt of other car manufacturers have also felt the effects. Yields and CDS prices have also blown out on manufacturers such as Mercedes, BMW, Peugeot and Renault as investors fear that the scandal will not be isolated to Volkswagen. Or as one commentator wryly put it “there is never one cockroach”.