OREANDA-NEWS. Volkswagen's 'A'/Stable rating could come under pressure if the crisis regarding alleged cheating on emission tests in the US deepens, Fitch Ratings says. In particular, the notice of violation of the Clean Air Act from the US Environmental Protection Agency (EPA) could seriously undermine the group's brand image, particularly in the US, where Volkswagen is already struggling to increase its market share.

But the financial impact of the maximum fine reported in the press, around USD18bn, and of the recalls, is unlikely to trigger an immediate downgrade of Volkswagen's ratings.

We believe the fine is unlikely to amount to the theoretical maximum amount of USD37,500 per car, although there have been only very few precedents of such cases and associated fines. In addition, the group's financial structure is sound and its free cash flow (FCF) generation extremely robust. We expect Volkswagen to generate about EUR3.5bn in FCF in 2015 after EUR2.3bn of dividends, and about EUR5bn a year after dividends in 2016 and 2017, excluding any impact from the current crisis. The group should also receive EUR5bn-5.5bn from the sale of its stakes in Lease Plan and Suzuki. We also believe Volkswagen could reduce capex in the foreseeable future. These factors should enable it to rapidly absorb the potential cash outlays from the US investigation.

The group has reacted promptly and vigorously to the EPA's allegations. It rapidly issued a statement to confirm its intention to give high priority to this crisis, including an external investigation.

Nonetheless, the consequences of this crisis for the group's brand image and reputation with regulators and consumers worldwide is difficult to assess. Potential class actions typical of such situations in the US could also result and increase total cash outflows in the next two years.

The EPA, which initiated the recall of incriminated vehicles, states that the alleged violations do not present a safety hazard, but we believe that this high-profile event could set a precedent for a bolder US environmental stance on vehicle emissions. It is also unclear whether the EPA's statement will prompt other regions to review Volkswagen's vehicles and whether the investigation will have any impact on future test regimes in Europe and other markets.