27 September 2016 by lberuti
After DB, next on the US Department of Justice’s list of companies they scrutinise is apparently VW ( Volkswagen AG ). The carmaker has already agreed to pay $16.5Bln in civil litigation fines in the US after admitting last year that they had fitted their diesel cars with defeat devices designed to game environmental tests. Now, the US DoJ is allegedly assessing how big a criminal fine it should impose on VW, and it seems that the question is “how big should it be without putting the carmaker out of business”. While equity investors kept their calm, the fact that the fine may be priced to the limit of VW’s financial ability spooked the credit market, and caused a dramatic move lower in the VW hybrid complex which comprises the most junior debt instruments sending them down as much as 3pts at some stage. VW’s 5-year risk premium was inevitably impacted, and it closed 14bps wider at 122bps, its worst 1-day move since Brexit.
Meanwhile, the broader credit market experienced another weak session. The negative tone once again came from the financial sector where DB led the charge wider, sparking some demand for protection on banks. It took a headline suggesting that there could be some room for negotiation regarding DB’s fine to stop the rot in the afternoon, and that allowed credit indices to close only moderately wider (iTraxx Main +1bp at 74bps and iTraxx Crossover +5bps at 338bps).