Volkswagen credit spreads rose despite pollution controls evasion

It is now official that Volkswagen is fined a maximum penalty of $18 billion by the U.S. Environmental Protection Agency on Friday for evading government pollution control.

Volkswagen is guilty of setting up a software called 'defeat device' to mask the true level of the car's emission forcing the government to demand recall for the vehicles with the installed software reaching to almost 500,000, as reported by Forbes.

Credit analysts noted the significant risks to VW's credit standing and reputation. "VW's operating margins have lagged peers (BMW, Daimler) for some time, and the automaker has cited encouraging U.S. vehicle sales in the context of its 2015 revenue and profit outlook," stated FTN Financial senior credit strategist Benjamin Millard in a credit note.

According to Fitch, the scandal is unlikely to trigger an immediate downgrade of VW's A rating, even though VW reportedly is facing an approximate penalty of $18 billion including any costs related to a recall effort.

On the other hand, the National Highway Traffic Safety Administration Administrator Mark Rosekind says, Volkswagen emissions scandal further erodes an element of trust between the U.S. regulator and automakers, underscoring a new protocol where government agencies must be more proactive and question every little information the industry give in terms of safety, fuel economy, and emissions.

"Part of the problem has been the reactive piece," Rosekind tells WardsAuto after addressing an Automotive Industry Action Group quality summit here. "You wait until something breaks or somebody withholds it and then you've got to find it and then you got to get it fixed.

Volkswagen admitted Friday that they used software to pass emission test, cheating EPA. After the test, the engines would revert back to their natural state and resume exuding 40 times the legal emission levels.

The German automaker's deception comes on the heels of a vast ignition-switch scandal at General Motors where a defective part killed and injured hundreds of people. Last week, GM agreed to pay $900 million federal fine, necessarily closing the financial book on the scandal.

Rosekind says the VW and GM cases are sending regulators scouring other automakers for safety emissions discrepancies.