OREANDA-NEWS. Fitch Ratings has affirmed Russia-based Volkswagen Bank RUS LLC's (VWBR) RUB5bn of fixed-rate rouble-denominated bonds (series 07) issued in June 2014 at Long-term 'A-'. The bonds have a tenor of five years with a put option in two years. The coupon for the first two years has been set at 9.35%.

Fitch has also assigned the upcoming issues (series 08 and 09) of fixed-rate rouble-denominated bonds an expected Long-term rating of 'A-(EXP)'. Each issue size will be up to RUB5bn, while other terms are yet to be determined. Proceeds from the issues will be used solely for VWBR's corporate purposes.

All of the above issues benefit from recourse to VWBR's German parent, Volkswagen Financial Services AG (VWFS AG). Should VWBR fail to make a coupon or principal payment under the terms of the bonds, bondholders will benefit from a public irrevocable offer (PIO) that would allow them to sell the bonds to VWFS AG.

The final rating of the upcoming bonds is contingent on the receipt of final documents conforming to information already provided.

The bonds' ratings are driven by potential support from VWFS AG, a wholly owned subsidiary of Volkswagen AG (VW AG; A/Stable). VWFS AG has provided the PIO to bondholders to buy back the bonds and cover outstanding coupons in case of default by VWBR. In affirming the rating, Fitch has not relied on the ability of bondholders to enforce the PIO in a Russian court, in case of need. However, the agency believes that VWFS AG, if required, would have a very strong propensity to honour the obligation due to its publicly expressed commitment to do so, potential reputational damage from not honouring the obligation and the importance of the Russian market for the VW Group.

The bonds will be settled through the Moscow Exchange, but in the unlikely scenario that this is not possible, settlement will take place through a paying agent, currently Rosbank (BBB/Negative), which may be replaced if its credit profile deteriorates, or through the direct purchase of the bonds by VWFS AG.

Although unlikely, the PIO could be terminated under certain conditions that are beyond VWFS AG's control, including impossibility of payments and settlements in Russia, nationalisation of VWBR, war or revolution, and circumstances under which none of the internationally recognised rating agencies assigns a credit rating to the Russian Federation.

Given the exposure of the structure of the placement to these quite extreme forms of country risk, the rating of the bonds is capped at a level no higher than two notches above Russia's sovereign ratings (BBB/Negative).

The ratings of the bonds may be downgraded if any of the following occurs:
-VW AG's and, consequently, VWFS AG's credit profiles weaken, undermining the latter's ability to pay under the PIO
-Russia's sovereign ratings are downgraded
-Termination of PIO

Upside potential for the bond's rating may result from an upgrade of Russia's sovereign ratings.