Explainer-Why is Siemens Energy seeking $16 billion state guarantees?

(Reuters) – Talks between the German government and Siemens Energy to strike a deal over around 15 billion euros ($15.9 billion) in guarantees for the power equipment firm continued over the weekend, according to two people familiar with the matter.

Shares in the company, which was spun off from former parent Siemens in 2020, fell as much as 39% to a record low last week after the discussions became public, the latest blow after the company unveiled major quality issues at its wind turbine unit Siemens Gamesa.

The sources in this story declined to be identified due to the sensitivity of the matter.

Here are answers to the most pressing questions:

IS THIS A GOVERNMENT BAIL-OUT?

No.

The company is seeking government guarantees to help realise its pipeline of large industrial projects, mainly in Siemens Energy’s former gas and power division, which builds and services gas turbines and manufactures large power converters stations.

Such guarantees, usually issued by companies and the banks they work with, are commonly issued for sizeable projects because industrial firms need to provide evidence to their customers that they can meet certain liabilities during the construction process.

In other words, it’s a financial backstop that ensures the project’s viability.

Big industrial orders that run over several years usually require these guarantees to secure principals’ downpayments as well as performance guarantees and warranties over a 3-5 year period or longer to ensure the viability of the project, according to a third source familiar with the matter.

This holds true for all major industrial firms and poses no problem as long as banks provide the necessary volume of guarantees, which in reality are almost never drawn.

According to data from the International Chamber of Commerce looking at the five-year period between 2016-2022, just 0.2% of such performance guarantees were ultimately drawn.

WHAT’S THE PROBLEM?

Siemens Energy’s order book has swollen to a record 109 billion euros, as of the end of June.

Around 20%-30% of that is in downpayments, which is the share that needs to be backstopped by guarantees, two separate people familiar with the matter said, adding that around half of that, or about 15 billion euros, needed to be covered by the government, banks and Siemens.

Banks, however, have become stricter due to higher interest rates, Siemens Energy’s deepening wind turbine problems as well as S&P’s move in July to downgrade the company’s long-term credit rating to BBB-, just one notch above junk, two of the sources said.

To make sure it can get the guarantees to fulfil its order backlog, Siemens Energy has turned to the government.

A spokesperson for the German Economy Ministry said on Sunday the government was in close contact with Siemens Energy and that discussions were ongoing, without elaborating.

WILL SIEMENS HELP WITH GUARANTEES?

Siemens owns a 25.1% stake in Siemens Energy and has not ruled out helping. Berlin has asked Siemens Chief Executive Roland Busch to provide some of the guarantees, and the expectation is that the German industrial giant will eventually budge, two other people familiar with the situation said.

However, Siemens is hesitant, according to the people, primarily due to the perceived mismanagement at the former subsidiary and the subsequent share price collapse.

Siemens still provides around 7 billion euros of performance guarantees to projects Siemens Energy is working on, significantly down from the 40 billion euros at the time of the spin-off around three years ago.

It has a vested interest in the stability of Siemens Energy because, under German corporate laws, it remains liable for the former division for five years after the spin-off.

Siemens declined to comment.

WHAT ELSE COULD SIEMENS ENERGY DO TO STRENGTHEN ITS FINANCES?

Apart from seeking guarantees from the government, banks and Siemens, Siemens Energy said it is “evaluating various measures to strengthen the balance sheet”, without elaborating further.

This includes routine considerations over a possible capital increase, two of the sources said, adding these were preliminary and no firm decisions hade been made.

In addition, the company is weighing the sale of smaller divisions to boost cash, following a recent deal to sell its high-voltage component division Trench to private equity fund Triton.

Siemens Energy declined to comment.

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