Cars and Drivers

Could a US Fine Put Volkswagen Out of Business?

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In June automaker Volkswagen agreed to settlements with the U.S. Environmental Protection Agency (EPA) and the state of California, and another with the Federal Trade Commission (FTC) that will cost the company $14.7 billion. But that may have been just the beginning of VW’s woes, not the end.

In a Bloomberg report published Tuesday, an unnamed source said that the U.S. Department of Justice (DoJ) is trying to figure out how much to fine Volkswagen over its diesel emissions cheating scandal without forcing the German automaker to go out of business. The sources said the DoJ and VW want to have a settlement in place before a new administration takes office in January 2017.

Calculating the fine depends to a large degree on how big the DoJ thinks the amount has to be in order both to change VW’s behavior and to deter other businesses from engaging in illegal conduct. The Bloomberg report noted:

Standard & Poor’s Ratings Services said in a note in February that it would consider lowering the carmaker’s rating only if its litigation costs exceeded 40 billion euros ($45 billion) or if its legal costs caused a severe negative impact on the company’s liquidity position, a scenario it considers unlikely.

By that measure, after U.S. civil penalties and accounting for maximum damages in German lawsuits, the company would still have a cushion of about $20 billion to absorb other litigation and investigation-related expenses.

A Bloomberg Intelligence credit analyst said that VW has “plenty of money to meet further fines” because penalties tend to be structured so the company can pay over time. According to the analyst, VW could be generating free cash flow of $5 billion by 2018. That would make paying a DoJ fine less onerous for the company but won’t assuage investors who will be shouldering a burden they didn’t expect and are likely to litigate for relief.

While it is unlikely that the DoJ will hit VW with the maximum penalty, the feds will want to make sure that the price is high enough to sting the company for its deceptive emissions control device and warn other carmakers that there’s a tougher sheriff in town.

 

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