VW Raising Cash? No Way!

LONDON -- Europe's biggest carmaker, Volkswagen, is reportedly considering a capital increase of up to 4 billion euros ($5.7 billion) to protect its credit rating after a merger with Porsche.

Last Thursday, Porsche Chief Executive Wendelin Wiedeking was ousted after the Piëch and Porsche families ended a longtime struggle over the future of the debt-laden German sports car maker, as a new management was seen as better positioned to smooth the path to a merger.

But some analysts thought the idea of a capital increase by Volkswagen was nonsense. "It is difficult to understand," said Michael Tyndall, an auto analyst with Nomura International in London. "Six weeks ago, at the company's most recent annual general meeting, VW tried to get a vote to issue preferred shares and they failed to do so. And issuing ordinary shares is not a realistic option."

Tyndall also said that issuing ordinary shares would dilute the 20.1% minority blocking stake held by the German state of Lower Saxony. "It doesn't take a lot of new shares to dilute Lower Saxony's controlling stake to below 20.1%," Tyndall said. "I can't see Lower Saxony voting in favor of this." Gregor Claussen, an analyst with Commerzbank, agreed. "A capital increase would dilute [Lower Saxony's] shareholdings, but it seems to be quite sure that Lower Saxony will keep its blocking minority."

Lower Saxony has long been against a takeover of VW. Thanks to a German law known as the "Volkswagen law," it is exceptionally allowed a blocking minority in voting rights regardless of whether the European Commission again contests the law.

Nomura analyst Tyndall also said VW has cash reserves of 11 billion euros and can therefore afford to pay Porsche. "They have done well through the second quarter and I would expect these cash reserves to have gone up," he said.

Yet a capital increase might seem logical from a credit-rating point of view. "A capital increase would make perfect sense for VW and would enable it to maintain its low-A ratings on S&P and Moody's despite the planned full takeover of Porsche AG over a period of two years," Sven Kreitmair, a debt analyst with Unicredit wrote in a note to investors on Monday, upgrading VW bonds to "overweight" from "market weight."

Rating agencies have their doubts about a combination of Porsche and VW, raising concerns that Porsche's high debt load could undermine VW's credit profile. Porsche's debt has reportedly increased to 14 billion euros as a result of the purchase of Volkswagen shares and the downturn in the European auto sector.

Shares of Porsche ( PSEPF - news - people ) fell 11%, to 45.68 euros ($64.96), in Frankfurt, reacting mainly to news of the capital increase. Volkswagen ( VLKAY - news - people ) dropped 2.2%, to 255.80 euros ($363.78).