Siemens Energy AG Assigned 'BBB' Issuer Credit Rating; Outlook Stable
- Siemens AG's conventional and renewable power generation and its power transmission and industrial applications related businesses, bundled under Siemens Energy AG, will be spun-off and publicly listed on Sept. 28, 2020.
- The new Siemens Energy holds market leading position in all its served markets, although most of these markets are exposed to significant changes in the global energy markets, suppressing growth and operating margins.
- After the carve-out and a €2.1 billion cash injection by Siemens AG in May 2020, the group reports a net cash financial position, low-to-zero adjusted debt, and has ample available liquidity.
- We are therefore assigning our 'BBB' long-term issuer rating to the group.
- With the finalization of our ratings on Siemens Energy AG we are also assigning our 'BBB' long-term issuer rating to Siemens Energy Global GmbH & Co. KG (Siemens Energy KG).
- The stable outlook reflects our expectation that Siemens Energy will successfully operate as a publicly listed independent company and maintain strong credit metrics over the next two years, despite the expected COVID-19 related economic slowdown and ongoing group restructuring.
FRANKFURT (S&P Global Ratings) Sept. 25, 2020--S&P Global Ratings today took the rating actions listed above.
Siemens Energy AG will be publicly listed on the Frankfurt Stock Exchange on Sept. 28, 2020. On May 26, 2020, Siemens AG (A+/Negative/A-1+) published a spin-off report outlining the legal separation of its Gas and Power operations and its approximately 67% stake held by the Siemens Group in Siemens Gamesa Renewable Energy, S.A. (SGRE), to form Siemens Energy AG. Fifty-five percent of shares in Siemens Energy AG will also be transferred to Siemens AG shareholders by way of a spin-off, and an additional 9.9% of shares will be transferred to Siemens Pension Trust, leaving Siemens AG's shareholding at 35.1%. Following the separation, Siemens AG will deconsolidate the new entity and no longer exercise any control over Siemens Energy. We understand it will further reduce its shareholding over the following 12-18 months after the public listing Sept. 28, 2020.
Siemens Energy shareholder and group structure will be as follows:
For further details on Siemens Energy and SGRE see "Company Description."
Siemens Energy benefits from its global reach, large installed base, and high order backlog. Our business risk assessment on technology group Siemens Energy is supported by its leading market positions, with the group holding either a first or second position in the relevant markets. With its comprehensive product offering, Siemens Energy is able to provide integral power generation and energy supply solutions globally, including related services. We view positively the group's order book of more than €77 billion, its large installed base of more than 90,000 units globally, and its strong share of service revenue of about 35%, all of which enhance revenue and cash flow visibility. Siemens Energy benefits from significant geographical, product, and customer diversification, a strong technology base, and its leading positions in relatively concentrated markets.
Renewable energy drives the group's growth and margins, and forms an integral part of the portfolio. In terms of our overall business risk profile assessment for Siemens Energy, SGRE plays a significant role. We expect SGRE will account for more than 35% of revenue and 50% of group EBITDA going forward after the spin-off, and will continue to achieve better growth and margins than the remainder of the group. SGRE's growth stems from a continuous shift toward renewable power generation, with accelerating growth in offshore wind parks where SGRE is the market leader. Despite SGRE's weaker first-half 2020 performance because of the outbreak of COVID-19, project delays, and the impairment of onshore assets, project pricing has improved, and we expect ongoing market consolidation will result in higher operating margins for leading players over the medium term. We consider SGRE a core entity of the Siemens Energy portfolio, and will equalize the issuer credit rating on SGRE with that on Siemens Energy after the spin-off has been completed.
We view the group's exposure to conventional power generation and oil and gas markets, which account for about 45% of the group's revenue, as negative. In particular, the group's large gas turbines business suffers from market overcapacity as a result of structural changes in the global energy landscape, reducing the number of new projects and putting pressure on profitability. Furthermore, large-project exposure, which is also an inherent feature of the group's transmission business, translates into more volatile cash flows and exposes the group to a multitude of project-related execution risks. Overall, volatility related to large projects is partly mitigated by the significant share of service revenue and cash flows from the group's generation and industrial applications divisions, as well as increasing service revenue at SGRE.
We expect Siemens Energy will return to growth after revenue and EBITDA declined in 2020, and that its EBITDA margin will gradually increase due to operational improvement and restructuring measures that the group has taken over the past two years. We assess the entity's profitability as significantly below average compared with the wider capital goods sector, with the company's reported EBITDA margin at about 6% in fiscals 2019 and 2018 (fiscal year ends Sept. 30). However, we acknowledge the conventional power generation market is going through a structural change and therefore do not view the business' margin profile as reflective of its underlying potential in a rightsized corporate structure. We expect Siemens Energy will improve its profitability over the next two-three years, but due to the COVID-19-related downturn and low oil prices, think the process will take longer than originally expected. We expect the group's profitability will be significantly lower in 2020 than in 2019 due to pandemic-related operational setbacks to both gas and power and at SGRE, as well as asset impairments at SGRE. We expect some of these issues will continue into fiscal 2021. We anticipate margin improvement from 2021, accelerating in 2022 and 2023, will stem from from SGRE's topline growth and better utilization of its fixed cost base (see chart 1). We also anticipate restructuring expenses in Gas and Power will gradually fade after peaking in 2020, and forecast significant further reduction in 2021 and 2022.
For more information on COVID-19 related ratings impact, please see our COVID-19 credit research site: https://www.spglobal.com/ratings/en/research-insights/topics/covid-19-macro-credit-research
The groups high cash balances, positive free operating cash flow (FOCF), strong liquidity, and absence of adjusted debt from 2022 supports our financial risk assessment. We forecast modestly positive FOCF for 2021, depressed by working capital outflows, but significant improvement in 2022 and 2023 due to improving profitability and working capital effects. Our FOCF assumption includes capital expenditure (capex) of €900 million-€1.0 billion per year. In April, Siemens AG carved out Siemens Energy and capitalized the group with an additional €2.1 billion cash injection. As a result the group currently reports a net cash financial position. We expect the group will report a cash balance of €3.0 billion-€3.5 billion at the end of fiscal year 2021 (of which 80% we assume available for debt service at all times), and financial debt including operating leases of less than €2.0 billion (of which nearly 50% related to International Financial Reporting Standards 16 treatment of operating leases). We add about a €0.8 billion net pension deficit to our adjusted debt calculation, and about €0.4 billion of factoring and guarantees. Due to positive FOCF, we forecast zero adjusted debt and reported cash of more than €4.0 billion from 2022. Furthermore, the group has €5 billion of undrawn liquidity lines at its disposal. The group's dividend policy mirrors that of Siemens AG, with 40%-60% of adjusted net earnings paid out each year. Overall we consider groups financial policy as prudent and in line with an investment grade rating.
Based on these assumptions, we forecast the below credit metrics:
The stable outlook on Siemens Energy reflects our expectation that the company will operate successfully as an independent group, and that will improve profitability from 2021. It further reflects our view that Siemens Energy has sufficient financial resources and liquidity to execute the planned group transition in the current economic environment. We expect the group will maintain low-to-zero leverage and generate positive FOCF over the next two years, posting adjusted debt to EBITDA below 1.5x and FFO to debt above 60%, and will be able to gradually improve its operating performance.
We could raise the rating, if, all else remaining equal, the Siemens Energy's overall profitability improves, with the company posting an S&P Global Ratings-adjusted EBITDA margin of 10% or higher, likely stemming from successful turnaround of conventional energy-related activities, coupled with margin improvement at SGRE.
We could lower the rating if:
- The group cannot not increase operating margins and absolute EBITDA as projected.
- Significant asset impairments emerge after the completion of the spin-off (from fiscal 2021).
- The company cannot generate sustainable positive FOCF.
- Restructuring costs are higher than expected.
- The group undertakes material debt-financed acquisitions.
- FFO to debt falls below 60% and debt to EBITDA increases to above 1.5x.
Related Criteria
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
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| Primary Credit Analyst: | Tuomas E Ekholm, CFA, Frankfurt (49) 69-33-999-123; tuomas.ekholm@spglobal.com |
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