Moody's downgrades VW on sector headwinds, Chinese competition: Report

Moody's has downgraded Volkswagen from Baa1 to A3, on the back of sector headwinds, structural issues and competition from China, besides the ongoing investment requirements, Reuters reported. 

The ratings agency noted in a statement that the downgrade reflects a recent contraction in operating margin and free cash flow generation, with limited expectation of a material recovery over the next quarters.

The difference in the downgrade is by a notch. It is still three notches above the junk category, Reuters reported. 

The previous week, Volkswagen forecasted another challenging year of ramping up electric vehicle sales, curtailing costs and navigating trade tensions amidst intense competition with cheaper and faster rivals in China, the newswire noted. 

The company is in the thick of major changes including new models and cost cuts in its two main markets of China and Germany, with earnings forecast to drop in China by up to 1 billion euros ($1.09 billion) in 2025.

"These measures, provided a successful execution could support an improvement in profitability by 2026/27," Moody's said in its statement.

It further noted that Volkswagen's robust balance sheet "with low leverage and very good liquidity ... gives the company time to implement strategic shifts and manage industry challenges."