A Different Way To Bet Against Volkswagen

Analyst Teo Lasarte still believes there is too much uncertainty surrounding Volkswagen for Bank of America to change its bearish outlook. In a new report, Lasarte discussed the Volkswagen situation and some ways to profit off the company’s downfall other than simply shorting the stock.

Four Risks

Lasarte sees four potential risks to the company as the Volkswagen emissions scandal continues to play out. Risks include regulatory fines, lawsuits, recall costs and a potential capital increase to the company’s financial segment. At this time, developments are too early-stage for Bank of America to attempt to quantify these risks accurately, but Lasarte estimated that the company could face €26.5 billion in liabilities.

Financial Services Will Take A Hit

According to Lasarte, about 20 percent of VW Financial Services’ balance sheet is exposed to the affected vehicles. A large drop in the residual values of the affected vehicles could cause a significant drop in VW Financial Services net asset value.

Related Link: Tesla Poised For Outsized Benefit From Volkswagen Scandal

China Remains Key

Volkswagen’s strong 2014 momentum had already come to a screeching halt this year prior to the emissions scandal on slumping sales volumes in Russia and China. Lasarte sees the company’s joint ventures in China and its Audi and Porsche divisions as relatively insulated from the scandal.

How To Play It

Lasarte believes that Volkswagen could soon choose to defer coupons on its corporate hybrid notes. “A scenario where the company stops dividends is plausible,” Lasarte explained.

Bank of America has initiated an Underweight rating on Volkswagen’s senior unsecured bonds, its corporate hybrids and its five-year CDs.

Disclosure: The author holds no position in the stocks mentioned.