Fitch Ratings has affirmed India-based Volkswagen Finance Private Limited's (VWFPL) National Long-Term

rating at 'Fitch AAA(ind)' with a Stable Outlook, and its National Short-Term rating at 'Fitch A1+(ind)'.

Fitch has also assigned VWFPL's proposed Rs. 5bn secured non-convertible debentures (NCDs) a 'Fitch AAA(ind)' rating. A full list of rating actions is provided at the end of this commentary.

The ratings reflect Fitch's expectations of support from VWFPL's parent and ultimate parent, Volkswagen Financial Services AG (VWFSAG) and Volkswagen Group (Volkswagen; 'A-'/Positive), respectively, if ever required. VWFPL has strong linkages with VWFSAG in terms of parent control over the Board and key

management positions. The former is also closely integrated with VWFSAG for planning and execution of business strategies for the Indian market. VWFSAG has also provided unconditional and irrevocable guarantees to various banks in India for VWFPL's rupee-based loans.

The ratings may be downgraded if VWFPL's linkages with and support from VWFSAG and Volkswagen are deemed by Fitch to have weakened or if Volkswagen's ratings are downgraded close to India's sovereign rating of 'BBB-'.

VWFPL focuses exclusively on financing Volkswagen group automobiles (Volkswagen, Audi and Skoda brands) in India. During the first full year of operations in FY12 (ended March 2012), VWFPL's loan book grew steeply, albeit from a low base, and was funded mainly by its equity base. The company has started to use commercial paper issuances, mainly for its short-term 'dealer financing' loan-book. It also plans to diversify its funding through issuance of NCDs and increase its bank loans lines to fund the growing long-duration asset base.

VWFPL targets to maintain the regulatory capital adequacy ratio (CAR) of around 20% over time. CAR at end-March 2012 was high at 78.6%, and is likely to shrink as asset base grows. High operating expenses incurred towards developing operational infrastructure exceeded income generated from nascent operations,

resulting in a net loss of Rs. 365.6m in FY12.

Established in 2009, VWFPL is a non-deposit accepting non-banking finance company, registered with the Reserve Bank of India. It is wholly owned, directly and indirectly, by VWFSAG - the captive finance company of Volkswagen.

A full list of ratings actions is as below:

• National Long-Term rating affirmed at 'Fitch AAA(ind)'; Outlook Stable
• National Short-Term rating affirmed at 'Fitch A1+(ind)'
• Rs. 7bn long-term bank loan affirmed at 'Fitch AAA(ind)'