According to two individuals familiar with the situation, negotiations between the German government and Siemens Energy (ENR1n.DE) to reach an agreement over around 15 billion euros ($15.9 billion) in guarantees for the power equipment company resumed over the weekend.

After the talks were made public, the company’s shares, which were split off from its previous parent Siemens (SIEGn.DE) in 2020, plunged as much as 39% to a record low last week. This was the latest setback following the revelation of serious quality problems at Siemens Gamesa, the company’s wind turbine division.

Because of the sensitivity of the subject, the sources for this article chose not to be named.

The following are responses to the most important queries:

DOES THE GOVERNMENT BAIL OUT HERE?

No.

The corporation is looking for government guarantees to help realize its pipeline of major industrial projects, primarily in the erstwhile gas and power segment of Siemens Energy, which constructs and maintains huge power converter plants and develops gas turbines.

Large-scale projects frequently require these kinds of guarantees, which are typically provided by businesses and the banks they partner with, since industrial enterprises must demonstrate to their clients that they are able to fulfill specific obligations during the building phase.

Put differently, it serves as a financial safety net that guarantees the project’s feasibility. According to a third source acquainted with the case, large industrial orders spanning many years often demand these guarantees to obtain principals’ downpayments as well as performance guarantees and warranties over a 3-5 year period or longer to assure the profitability of the project.

This is true for all large industrial companies and is unproblematic as long as banks offer the required amount of guarantees, which are, in practice, practically never provided.

The International Chamber of Commerce reports that, throughout the course of the five years from 2016 to 2022, just 0.2% of these performance commitments were actually fulfilled.

Describing the problem.

As of the end of June, Siemens Energy had a record-breaking 109 billion euros in orders. According to two different sources with knowledge of the situation, between 20% and 30% of that sum is in down payments or the portion that requires guarantees. Additionally, they stated that the government, banks, and Siemens would need to contribute roughly half of that sum or 15 billion euros.

However, two of the individuals stated that banks have tightened their guidelines as a result of rising interest rates, Siemens Energy’s worsening wind turbine issues, and S&P’s decision in July to lower the company’s long-term credit rating to BBB-, which is only one rung above trash.

Siemens Energy has gone to the government to ensure that it can obtain the assurances necessary to execute its backlog of orders.

Without providing any details, a spokesman for the German Economy Ministry stated on Sunday that talks were still underway and that the government was in close communication with Siemens Energy.

ARE SIEMENS GUARANTEES GOING TO ASSIST?

Siemens holds a 25.1% share in Siemens Energy and has expressed interest in lending a hand. According to two additional persons familiar with the matter, Berlin has requested Siemens Chief Executive Roland Busch to offer some of the assurances, and it is anticipated that the German industrial giant will finally yield.

The people claim that Siemens is hesitant, nevertheless, mostly because of the alleged poor management at the former subsidiary and the resulting decline in share price.

Siemens still offers performance guarantees to Siemens Energy projects worth around 7 billion euros, a substantial decrease from the 40 billion euros at the time of the spin-off almost three years ago.

Due to its five-year liability for the former division following the spin-off under German corporate law, it has a stake in Siemens Energy’s stability. Siemens opted not to respond.

HOW ELSE MAY SIEMENS ENERGY IMPROVE ITS FINANCES?

In addition to asking for guarantees from banks, the government, and Siemens, Siemens Energy stated that it is “evaluating various measures to strengthen the balance sheet” but did not provide any details.

Two of the individuals stated that typical discussions about a potential capital increase are included in this, but they added that they were only preliminary and that no definite decisions had been taken.

The recent agreement to sell Trench, its high-voltage component division, to private equity firm Triton demonstrates that the corporation is also considering the sale of smaller businesses to raise more money. Siemens Energy opted not to respond.