Financial Services Making the difference

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Introduction March 1, 2013 Acknowledged as one of the world's most innovative technology companies – as well as one of the world’s largest – Siemens has won increasing attention for its financial services activities. Certainly, Siemens Financial Services (SFS), its “captive” financing arm, is growing in stature. Yet the growing importance of SFS also reflects the chang-es taking place in corporate finance and in the wider financial markets. Such changes are affecting refinancing options, as well as general corporate financing strategies, and are encouraging captive financing institutions to take a more active role. This is especially so with respect to enabling the project finance and equipment-sales finance activities that support the parent’s business.

Indeed, volatilities in financial markets – as well as structural changes, and an altered view on risk within financial institutions – are having a deep and lasting impact on the funding environment for companies. And the constraints currently being felt within funding sources such as banks are likely to become structural due to the proposed regulatory changes brought about as an understandable response to the 2008 banking crisis – meaning that alternative sources of finance will rise in importance.

The aim of this white paper is to contribute to the debates emerging from these trends. It sets out the case for an expanded role for captive financing institutions, in creating value for their parent companies, as well as their customers. The paper dis-cusses how these providers can evolve to fulfil their expanded role, e.g. by supporting new business models, and stresses the resulting need for excellent risk management capabilities.

This paper was developed through interviews with senior management across the various business units of SFS – soliciting their personal views regarding the current and future landscape as they view it. It sets out the case for this expansion.

Financial Services

Making the difference

Why the changing financial landscape is creating an expanded role for captive financing institutions

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1. Management Summary 3

2. The financial environment since the 2008 financial crisis 4

2.1 Growing demand for private financing 4

2.2 Constraints in bank liquidity 4

2.3 Changing project financing structures 5

2.4 The financing gap and new sources of funding 6

2.5 The changing role of banks 7

2.6 Trends in insurance 8

3. A more prominent role for captive financing institutions 8

3.1 Providing financing to enable business 8

3.2 Supporting technology 8

3.3 Creating ownership experience 10

4. Siemens Financial Services 10

4.1 SFS’s mission 10

4.2 SFS’s business principles 12

4.3 The Siemens banking license 12

5. Conclusions 13

5.1 Active participation required 13

5.2 Combination of financial and technological expertise beneficial 13

5.3 Risk management vital 14

5.4 Collaboration key 14

6. Methodology 15

Contents

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1. Management Summary Since the 2008 financial crisis, bank liquidity for corpo-

rate lending has been selective. This was initially due to the heightened risk concerns globally, as well as the banks’ need to improve their capital positions. More recently, financing conditions have improved in some regions – mainly Asia and the U.S.

Meanwhile, a raft of regulatory reforms – initiated to prevent a repeat of the systemic threats posed to the banking system during the 2008 crisis – may have a structural impact on lending appetite. Basel III, Dodd-Frank and more local legislation may result in bank lenders becoming more risk-averse or selective when deploying their balance sheets. This may affect the future availability, and the future price, of bank credit.

As a consequence, many leading banks are accelerat-ing the trend of moving towards an “originator-distributor” model. Their aim is to include a wider group of investors in their distribution of financial assets, but to hold fewer debt assets on their balance sheets.

Conveniently, this mirrors growing appetite among non-bank lenders for infrastructure finance assets. This trend is triggered by the low-interest rate environ-ment, which is making the relatively higher yields from infrastructure investments look attractive for investors. Also, insurance companies, institutional investors and specialist funds that have already invested in infra-structure deals are keen to diversify their portfolio of projects and are, therefore, increasingly becoming passive investors in a range of projects. This makes infrastructure investment a more typical asset class for institutions.

While the need for new liquidity has become clear, some concern has been expressed regarding “shadow banks” – the collective name for non-bank financial in-stitutions that provide banking-style services such as hedge funds. By definition, shadow banks do not take deposits, which means they of free of most regulatory restrictions and can therefore adopt more aggressive business models. Despite the additional liquidity they provide, shadow banks are often perceived as risky entities.

Moreover, project finance and infrastructure financing models are changing. Now an established model, Public Private Partnerships (PPP) are becoming more popular globally. And so-called club deals are bringing together groups of varied financiers to source investment capital to support project or infrastructure finance.

This means there is an important partnership role for banks to play – using their expertise at assessing pro-jects to originate and structure deals that are potential-ly also financially-backed by the major suppliers.

Another moderating factor is the insurance market: Recent catastrophic events such as the 2011 tsunami in Japan have added to post-crisis constraints within this market, which also negatively impacts bank lend-ing. In addition, regulatory concerns such as Solvency 2 may result in rising premiums and reduce available insurance capacity for certain risks. However, some of the lost capacity is being replaced by new investors in the insurance markets.

In this environment, “captive” financing institutions have an attractive and unique value proposition: to provide both the technology and funding from a single source. Siemens has the power to grow its role in providing financial solutions for its customers along its entire “value chain” by combining industrial and financial logic in new business models.

Siemens' presence as a stakeholder in major projects is a key requirement for giving other financiers faith in all stages of – often long-term – projects. It sends a mes-sage of confidence to the markets – helping innovative technologies to be implemented faster.

SFS – as the financial services arm of a major corporate – focuses on adding value to its parent Siemens in both regulated and non-regulated areas of financial services. It has three key roles that may be viewed as substitutional for other captive financing institutions:

(1) Utilizing Siemens’ balance sheet strength and the company's commitment to a strong financial profile to enable investments in Siemens’ projects and products. A particular aim is to introduce new and attractive business models to Siemens’ customers, such as pay-for-performance or managed services contracts. A further objective is to signal confidence through long-term financial risk-sharing in Siemens’ solutions.

(2) To manage Siemens’ financial risk analogous to relevant banking and insurance standards. SFS is lever-aging its strong risk-assessment capabilities, especially with respect to the technologies being developed within Siemens, as well as its purchasing power in the relevant financial markets.

(3) To provide finance for customers who are not currently Siemens’ customers in order to diversify its portfolio. In this respect, a further aim is to encourage financing customers to buy Siemens’ equipment for future projects.


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Additionally, small and midcap companies are important business partners for captive financing institutions. However, many are struggling to find the liquidity they require, or find it at greatly increased costs. In these cases, SFS’s role is to help, for example with commercial finance and/or receivables financing solutions.

Focusing on financial services brings with it the re-quirements for specific expertise in risk management. As for any financial services institution, successful captives are required to be viable business on their own merits, and risks will have to be calculated and managed judi-ciously with all relevant tools from the banking and the insurance industries. To ensure this, SFS is developing tailored risk-assessment and risk-sharing models with other financing partners for each project.

Overall, collaboration is becoming a key element in structuring financial solutions. As a captive, SFS plays a crucial role in enrolling and supporting entities from various corners of the major project or technology-supply financing universe. This puts SFS at the hub of such collaboration, which is a major future role for captives such as SFS. Ultimately, SFS’s key role is to inject confidence into the process.

2. The financial environment since the 2008 financial crisis

2.1 Growing demand for private financing

A “value chain” is a chain of activities that a firm operating in a specific industry performs in order to deliver products and services. And such a value chain defines Siemens’ role as a provider of key technologies to specific markets such as healthcare, energy, industry, infrastructure and cities.

Customers and suppliers – the two sides of this value chain – are reliant on externally-supplied liquidity for working capital, as well as capital expenditures (capex) or to fund investments – including project or trade-related finance, e.g. for infrastructure investment. Indeed, liquidi-ty is crucial for suppliers to deliver on time and within budget – as well as for buyers to support their purchasing power.

In particular, infrastructure needs are burgeoning. Cities are proliferating in the developing world, creating an enormous infrastructure requirement. Also, many devel-oped-world cities need to replace decades-old infrastruc-ture that is no longer fit for purpose. Although urgent, this requirement comes at a time of constrained public financ-es and “deficit reduction”, which is restraining public enti-ties despite the potentially-contrary demands to fuel eco-nomic growth. This means that the private sector will need to meet these future financing needs – generating further demands for liquidity.

2.2 Constraints in bank liquidity

Despite these needs, since the 2008 crisis, bank liquidity for many companies has been selective. The availability of long-term funding at a predictable cost has become restricted as banks have retrenched from riskier financings in order to repair their balance sheets. Indeed, banks have become more risk averse generally – a move likely to be re-enforced by regulatory proposals covering all developed banking markets.

In response to the systemic threats generated by the crisis, proposed banking regulations such as Basel III – as well as more local regulatory regimes such as Dodd-Frank in the US – may enshrine this more cautious post-crisis approach. Under such regulation, banks are likely to be required to adopt a more conservative approach with



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respect to the use of their balance sheet for lending. While a correct response to the crisis, this may reduce their risk appetite, which could restrict both their overall exposures and the average tenor of their financing. Certainly, the changes are likely to restrict the banks’ use of their bal-ance sheets for investment in perhaps riskier technologies such as renewable energy and other areas of Siemens’ operations.

Roland Chalons-Browne, CEO of Siemens Financial Services:

“There is less access to medi-um and long-term funding at a predictable cost. For in-stance, if doing a major infra-structure project, in order to lend banks need to be com-

fortable that they have 20-year funding in, for exam-ple, sterling. This is less certain than it was, so banks have become less active in the project finance arena as a result.”

Kirk Edelman, CEO of SFS Project & Structured Finance Energy:

“Project finance still relies a great deal on the banks for capital, which is unlikely to change. Yet non-bank lenders are playing an increasingly-important role, and that role

will continue to grow, although – as with previous cycles – players may jump in and then pull out of the market for various reasons.”

Johannes Schmidt, CEO of SFS Project and Structured Finance Infrastructure & Cities and Industry:

“Banks are no longer financ-ing as many projects as their risk-assessment practices are now much tighter. In part this is driven by the fact meeting

regulatory requirements is taking precedence over analyzing project risks. As a result, they’re making short-term assessments of long-term obligations and looking at long tenors unfavorably, which means there is a growing need for additional/alternative investors.”

For investors in technologies, access to medium or long/term funding at predictable costs has, therefore, become a concern. Banks that previously dominated the corporate, equipment and project finance market are re-treating, while other, potentially-new sources of funding (such as institutional investors) are finding it difficult to access this market.

Mark Roemer, Head of Global Markets, SFS Treasury:

“Banks are being hampered by regulatory issues such as Basel III and regional regula-tions from the EU as well as Dodd-Frank in the U.S. These regulations are targeted at bank balance sheets, requir-

ing a further equity cushion from the banks. This means banks have to fund this equity cushion – via public or private offerings or by allocating capital more efficiently. And this means that costs for cus-tomers are rising – which is a global phenomenon.”

2.3 Changing project financing structures

Also, project and infrastructure models are changing. Public Private Partnerships (PPP) have become a globally-popular project finance structure for infrastructure pro-jects – moving the market away from the typical public-sector mandate. PPPs usually involve significant risk trans-fers away from the mandating public entity and towards the private sector – risks that need to be understood by investors.

The Australian healthcare market is an example of this trend, with projects being organized as PPP concessions. The deals are typically financed for around 10 years and achieve high investment-grade ratings due to the implicit public support. Such transactions tend to rely on a major investment from the consortium members awarded the projects or supply contracts, which can include both equity and, increasingly, debt capital. Indeed, companies winning the bids are increasingly doing so on the basis of the financing package being offered.

Another established financing model becoming more popular is the club deal, in which syndications are kept within a tight-knit grouping. Project finance syndications have seen a narrowing of their distribution as key lenders take and hold larger stakes in transactions in order to support deep client relationships. While this has allowed key deals to win financing – even in the midst of the financial squeeze – it restricts the number of financeable deals and reduces the overall availability of cash for project finance.








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2.4 The financing gap and new sources of funding

This increasing demand for finance – combined with the reduced supply of bank credit – is resulting in a financing gap in project finance. Yet this gap varies by region. In the U.S., for instance, there has been a rebound from the crisis in terms of bank lending and liquidity, and Asia has weathered the crisis well. Meanwhile, in Europe, major concerns remain.

Certainly, banks are returning to the U.S. project finance market with significant lending appetite, even if from a different range of banks (the Japanese and Canadian banks replacing the European banks that have significantly retrenched). Structured deals are also back, as is the high-yield market. In Asia, there is also ample liquidity – with Japanese banks playing a significant role as well as a growing number of other Asian banks (from India, China and elsewhere). But European banks are under significant pressure, which is having a detrimental impact on liquidity in Europe, and especially on project finance appetite amongst banks that were previously some of its largest debt providers.

Potentially, the resulting funding gap is a challenge, and non-bank lenders can contribute in closing the gap, par-ticularly considering infrastructure finance. The reason for this is that a large percentage of private capital is currently locked up in low-yielding investments, which is likely to become at least a medium-term phenomenon (as central banks in the developed world remain determined to keep interest rates low). This means private investors – unable to generate attractive returns from conventional fixed-income instruments – are looking for more attractive risk-return-profiles in less conventional asset markets. Infra-structure financing is becoming increasingly attractive in this respect.

As stated, there are huge infrastructure needs, both in the developed world and in the emerging markets. Yet the new investors have yet to fully connect with the increas-ing need for project finance capital. This is mostly a risk concern. At the moment, investors lack the expertise to evaluate deals, which – for a company such as Siemens – is an opportunity, for example by initiating projects that adopt financing structures these new pools of finance can support.


“Infrastructure funds have a significant role to play in the future of infrastructure financ-ing as they can combine the ability to understand complex

structures, accurately assess risk, and negotiate fa-vorable terms with a long-term outlook and appetite.”

Of course, insurance companies, institutional investors and specialist funds have already invested in infrastructure deals – often through major equity stakes in key projects. Yet many are now seeking to diversify their portfolio of projects. They are increasingly becoming passive or indi-rect investors in infrastructure funds that invest in a range of projects. But also in other sectors such as energy, specialist funds are increasingly active in financing major projects, as are sovereign wealth funds. Such pools of liquidity are keen to invest, but – as their investments in this area grow – are also keen to diversify their invest-ments across a wide range of projects.

Andreas Schumacher, Head of Strategic Development, SFS:

“Interest rates are at a histor-ical low and many experts believe they will remain so. A large amount of capital is seeking moderately-higher returns than well rated

sovereign bonds can offer. This is an opportunity: capital can be channeled into appropriate vehicles that can support infrastructure needs. In addition to an interesting risk/return profile, these investments can offer an intrinsic inflation hedge.”

Private equity funds are a further investor-group becoming interested in project finance. Several such funds have created dedicated mezzanine (or subordinated debt) funds targeting the energy and infrastructure markets. A recent example is the Meerwind offshore wind energy project, which was sponsored by the private equity fund Black-stone. Indeed, many of these new investors are keen to invest in new technology but are also concerned regarding the technology risk of such ventures, which means they view as important the signal of confidence sent by captive financing institutions such as SFS (especially given their risk-assessment capabilities).







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2.5 The changing role of banks

Based on the above points, one future role for captive financing institutions is to therefore act as a catalyst, en-couraging new entrants into the financial services market. Yet it is also important to understand how the role of the banks is changing – or evolving – and the impact this will have on other players in the infrastructure finance arena.

A clear change is the move towards an “originator-distributor” model – a trend that goes back to the 1990s, although has been pursued with added vigor since the 2008 financial crisis. The aim of this model is to originate major financings while including a wider group of inves-tors in the distribution of financial assets. Banks retain the role of underwriter and (partial) investor. The originator-distributor model allows banks to widen their pool of in-vestors, which should diversify risk as well as attract more capital.

In fact, this changed – and more fragmented – role for the banks is matched by changes in the investment universe, especially in project finance. While the number and type of investors in infrastructure projects is increasing, they are dividing into two distinct camps in terms of how they invest. Some parties tend to invest in the early stages of a project, although are then likely to exit in order to invest in other early-stage projects. This group includes strategic investors such as construction companies using their in-vestment to win contracts. But there are also specialist investors who enjoy the higher potential returns offered during the construction phase. Long-term investors such as pension funds and insurers, meanwhile, have less risk appetite for early-stage projects and prefer the stability of the operational stage.

And the growing number of specialist infrastructure funds will also have a significant role to play in the future of infrastructure financing. They can combine the ability to understand complex structures, accurately assess risk, and negotiate favorable terms while maintaining a long-term outlook and appetite. These funds could lend alongside institutional investors – therefore creating an alignment of interests – and can also take equity stakes.

In fact, the need for both debt and equity investors is increasing. Collateralized debt obligations (CDOs), once a viable way of sourcing debt funding for projects have all-but disappeared since the 2008 crisis, which has increased the need for new debt investors. Indeed, a further result of the crisis has been a significant change in debt-to-equity ratios. Whereas 10 percent equity once sufficed, a minimum of 30 percent is now required, and many players are either delaying projects or dropping out of the market altogether as a result.

Anthony Casciano, CEO of SFS Project, Structured and Lever-aged Finance Healthcare:

“The leverage levels seen in past deals are unlikely to be surpassed in the future: com-panies will not allow it as the strain on the balance sheet is too high. Prior to the crisis we

were looking at debt to equity ratios of 9:1, although this has now become 3-4:1 at the most. The lower leverage levels mean that the need is to find far more equity, which has to come from the borrower or an-other investment source such as a private equity partner.”

Such trends suit the global banks because of their unri-valled access to the international capital markets, which will become increasingly important for a project finance sector anxious to tap new pools of investment. Indeed, an important future role for banks in infrastructure finance is to structure transactions that attract new pools of liquidity – such as hedge funds or private equity.

Related to this is the trend for banks to move towards fee-paying services such as an advisory or agency role. This is a natural progression of the “originator-distributor” model and can become a core competence for their often highly-skilled project finance teams.

Finally, banks are expanding their role in the fee-paying execution elements of project and equipment finance, which includes offering enhanced services in cash man-agement, pooling and payments, current accounts and other basic banking services (perhaps acting as the agent bank on project financings). With this in mind, many banks have made significant investments in IT infrastruc-tures and platforms that provide such services electroni-cally.











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2.6 Trends in insurance

Compared to the banking industry, the insurance market has been less affected by the financial crisis. Indeed, in-surance is still impacted more from non- financial events – for instance insured losses due to the 2011 tsunami in Japan and the 2012 hurricane Sandy in the U.S. Addition-ally, falling asset returns start to show their impact as well. Nonetheless, a general trend towards higher premiums and/ or reduced insurance capacities cannot be observed at present. That said, the upcoming Solvency 2 Directive (an EU capital-adequacy regulation that is likely to have a similar impact on insurers as Basel III is having on banks and which is expected to be introduced by 2017) will require insurers to attach increased capital to their risks, which could then result in an increase of premiums and a restriction of available insurance capacities.

Alexander Mahnke, CEO of SFS Insurance:

“In the project finance sector, the demand for insurance mirrors the demand for pro-ject financing. Insurability leads to bankability due to banks being able to source cover for their exposures.

Therefore, proving insurability and sourcing the necessary insurance capacities can prove to be a key element for the actual investment decision. This said, a high-grade risk assessment and a strong marketing strategy are important for new technologies and/or new business models in order to receive the right access to the necessary insurance markets and their capacity. While we can see no overall trend of rising

risk transfer costs, the quality of analyzing and then presenting the risks attached to the projects has a growing influence on the availability of insurance capacity and the attached cost.”

However, new insurance capacity is coming to the market via boutique financiers – often privately-raised investment capital looking to utilize specialist knowledge. These new, non-traditional, investors are looking for returns away from traditional asset classes due to the low interest-rate environment. More and more view risk transfer assets such as insurance as areas capable of providing higher returns. While yet to become a reliable investor class – and therefore not a like-for-like replacement for the lost capacity – the long-term appetite of financial boutiques for risks such as offshore wind turbines is likely to in-crease.

3. A more prominent role for captive financing institutions

3.1 Providing financing to enable business

Major captive financing institutions are keen to offer solu-tions to the challenges posed by these new market condi-tions and the resulting changes in customer-demand for financing. While some industrial companies may partner with banks to help solve the liquidity constraints of their customers, others will – with respect to financing – develop in-house solutions.

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along the value chain of its parent company. It acts as an enabler for Siemens by providing investment capital where it is needed, as well as in the form required. This can be in terms of commercial finance, including asset finance, project and structured finance, or as leveraged finance. Investment can also be in the form of debt or equity. And SFS can also assist the commercial needs of Siemens and its customers by creating insurance solutions or guarantee products.

3.2 Supporting technology

Importantly, Siemens can use its knowledge as a manufac-turer of technology to become involved in a broader spec-trum of financial situations. This is a natural progression for the company and a strong role for a captive financing arm to adopt. In areas where the technology will be a major factor when evaluating the risk – in offshore wind for example – Siemens is in a position to develop projects to the point where they are financeable from independent sources. This includes injecting seed equity, but can also include providing debt capital.


“In offshore wind, Siemens may be supplying and erecting the wind turbines and associ-ated infrastructure. In addi-tion, Siemens may also be providing significant equity

capital, which may have been a requirement in order to win the mandate. With a significant equity invest-ment in the project, we therefore have to view the deal, not only as an equipment supplier, but also as a long-term investor.”

Indeed, there is a rapid evolution taking place in innova-tive technologies, with Siemens at the forefront. These technologies require Siemens’ support to become finan-cially viable, making Siemens’ role one of developing technology-centred projects before attracting external investors with the medium-term commitment of Siemens embedded. Signalling confidence for projects where tech-nology risk is a major factor is therefore a key role for Siemens. Yet this is a risk management and risk-placing role as much as it is a risk-taking role.

Roland Chalons-Browne, CEO of Siemens Financial Services:

“While cautious, SFS is there to take technology risk – from the early stages, but also in mature phases. Of course, technology is our specialist area so it is the

role we should be playing. Siemens’ assessment of the risk should be far more accurate than a banks’ because we can tap into the expertise of Siemens globally.”


“Offering capital solutions is the major role for a captive financing arm. When devel-opers are looking to award mandates to consortiums they will undoubtedly ask:

how much capital can the key project stakeholders bring to the project? A good example has been the wind sector. The larger mandates all involved the equipment suppliers investing capital into the pro-jects – typically in the form of early-stage equity but sometimes in the form of debt.”

Apart from adding confidence with respect to technology risk, there is also a wider role for captive financing institu-tions as conscious risk takers with respect to debt partici-pations. SFS can leverage off its expert evaluation of the technical and economic viability of projects and assets – drawing on the experience of in-house specialists in the Siemens sectors. On several occasions, especially in the renewable energy sector, debt participation by SFS was viewed as vital by the banks in order to achieve financial close. This is a unique role for captive financiers, enabling them to act as a catalyst. Such participation offers other investors and partners confidence regarding the future of a particular technology. SFS provides customers with addi-tional assurance that Siemens believes in the long-term success of its projects.

Peter Rathgeb, Head of Risk Controlling, SFS:

“If we are going into a trans-action that has technology there will be risk. Yet we have faith that we can analyze the risk properly, which we think creates a major advantage for us.”



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In this capacity, SFS is required to step in early and assist in the structuring of the deal: for instance by identifying the equity, debt and hybrid financing needs. This is both a cash flow-based economic assessment and financial-risk evaluation, and a requirement for a thorough analysis of the typically complex contractual arrangements. Such contracts allocate the project’s risks across the project’s participants, and are vital for minimizing the overall pro-ject risk, and thus the credit risk for lending institutions.

Being a catalyst does not mean taking extraordinary or uncontrolled risks, however. Indeed, such a full analysis allows SFS to generate risk mitigation solutions that facilitate Siemens’ investment in its own technology while managing the potential downside.

3.3 Creating an ownership experience

A greater financing role also fits with other technology and equipment purchasing trends. Increasingly, acquiring entities are moving away from buying equipment outright, perhaps with a maintenance contract as an addendum. Today, customers are more commonly seeking to buy the performance rather than purchase – and therefore own – the product outright, a trend seen in many areas of the equipment-supply universe. Buyers want to engage in an ownership experience without taking title to highly-specialized and expensively-maintained equipment. Again, this is a trend requiring innovative financing and owner-ship models for major equipment supply projects.

Innovative leasing structures are an example of the solutions available. These can comprise various forms of finance or operating leases, as well as programmes such as hire purchase, rental loans and software financing. It can also include managed services, as well as innovative structures such as usage-based financing for equipment investments, such as pay-per-performance programmes. Here, Siemens covers the management of financed assets as well as end-of-term issues such as logistics, equipment servicing and remarketing.

Siemens views such integrated financial solutions as a strong use of the company’s balance sheet, as well as an effective leveraging of the company’s experience and technological know-how.

4. Siemens Financial Services

4.1 SFS’s mission

With the overall increasing importance of financing based on the described market trends, SFS has defined a broad mission as a captive financing institution: to support and enable the business of its parent.

Peter Moritz, CFO, SFS:

“SFS – as a part of Siemens – is focused on supporting the wider aims of its parent. SFS also has no excessive focus on narrow volume or profit tar-gets. It has a strong and prov-en track-record as a balanced risk taker and risk manager.”

Specifically, SFS’s three strategic cornerstones are:

To support Siemens’ sales –

As with all captives, a key role for SFS is to leverage the relative strength of the company’s balance sheet to finance Siemens’ projects and products in its core sectors. This can include straight financing models. Where appro-priate, it can also encourage more innovative financing or acquisition models such as pay-per-performance, which involves payback via energy savings, for instance. Indeed, a central SFS objective is to help clients across Siemens’ sectors realize larger visions, as well as to run more con-nected operations, and to shape new models of economic performance.






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Certainly, a key role of SFS is to signal confidence to the market – for example regarding the effectiveness of new technologies. A further aim is to broaden the potential customer base, perhaps using financial structures to ex-tend the ability for customers to both afford acquisitions and realize project ambitions.

To manage Siemens’ financial risks –

A second SFS role is to manage Siemens’ financial risks. This role covers managing financial risk in a narrow sense – analogous to the credit risk departments of major banks. An example is the development of tailored risk-sharing models with other financing partners for each project. Yet managing financial risks also requires a deep proprietary knowledge of market trends, secondary markets, ratings and risk evaluations. In this role, SFS also provides ratings and price calculations for the counterparties of Siemens’ industrial entities and for Siemens’ corporate treasury, a service that is rare among captive financing instiutions. Hence, there is a natural advantage for a captive to act as a centre of excellence and execute the financial risk-management function for the entire company.

Managing Siemens’ financial risks also involves profitabil-ity optimization (e.g. via “make or buy” decisions, or by seeking project funding from the external banking market rather than exposing Siemens’ own balance sheet), and in leveraging the purchasing power – and strong rating – of Siemens with respect to financial services and the capital markets.

Insurance is another element of the risk management role. On the one hand, the insurance team within SFS analyzes the risks with respect to Siemens’ operations. On the other hand, the insurance team assesses the insurability of projects that include the involvement of Siemens. The aim is to leverage the insight and information available to Siemens regarding both its operating and financing roles and then create strategies for managing the risks identi-fied from this process (including the transfer to an insur-er’s balance sheet). Apart from risk identification, the team designs and implements insurance strategies – engaging with the insurance market to obtain risk cover externally or, cumulatively or alternatively, to cover them via Siemens’ own captive reinsurer.

The team sources the capacity for Siemens risk in the market, which gives SFS leverage with respect to design-ing packages for the market to cover. Again, SFS sees its role as an enabling one, especially in terms of helping Siemens match technology evolution with innovative insurance concepts and coverage.


“We design and implement financing strategies for Siemens’ liability, property, marine and construction risks. In doing this, we can combine risk transfer to the insurance markets with risk financing

through our captive reinsurance company and there-fore come up with the economically most efficient so-lution for the company.”

To offer financing to third parties –

A final role concerns third parties. While primarily a captive financing institution, SFS also offers third-party business-to-business financial solutions to companies in Siemens’ core sectors of healthcare, energy, industry, and infrastructure and cities. This helps to broaden the asset base on the balance sheet and to validate the competi-tiveness of the company’s products and solutions. But it also contributes to Siemens’ earnings growth. Third-party financing is also a strong mechanism for encouraging future customers to acquire Siemens’ equipment, and it furthers SFS’s aim of remaining innovative and connected to the wider financial and commercial markets.

A particular example of SFS’ successful expansion with respect to third-party finance is the help currently being afforded the small and medium-sized enterprise (SME) sector. Two examples of this are vendor-referred financing within SFS’s Commercial Finance (COF) business and receivables finance. Indeed, SFS COF offers a broad spec-trum of equipment finance solutions, much of it highly-automated equipment financing for SMEs supported by web-based solutions.

Jonathan Andrew, CEO of SFS COF:

“We sell debt products directly, using our own sales force. Often this is to leverage Siemens’ kit sales in four industry areas – energy, healthcare, infrastruc-ture and industry. However, Siemens equipment is not a

necessity, although it helps that we can talk to other equipment suppliers in their language.”

Vendor-referred financing involves bigger-ticket transac-tions where SFS works with the equipment vendor to provide tailored financing packages – including leasing – that are embedded within the sale. Receivables financing, meanwhile, utilizes SFS’s aforementioned analysis of cred-it risk on trading entities – allowing SFS to be innovative in terms of the placement of the risks. Already, SFS has





http://www.siemens.com/vendor-finance






http://www.siemens.com/energy-finance

http://www.siemens.com/healthcare-finance



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created receivables portfolios on Siemens’ credit expo-sures that it can liquidate by discounting the bundles of receivables into the market. This is a form of receivables securitization, which needs a rating, as well as transparen-cy on the risks.

Jonathan Andrew, CEO of SFS COF:

“Some major companies are industrial financiers of their own equipment that have strong and transferable com-petences that go beyond their own kit. Meanwhile, SFS COF is at arms’ length from the par-

ent, so we stand and fall on the returns we generate as a financier. Of course, we enable Siemens’ sales but also have to be an effective use of capital. From this discipline, we think our future role as a vendor financier will grow.”

4.2 SFS’s business principles

4.2.1 Commitment as corporate citizen

A key role for SFS is to act as a catalyst for additional investment, which requires the company to commit to its role as a trustworthy corporate citizen.


“We have real conviction in what we do and the value we can add. In fact, we couldn’t operate if this was not the case as we cannot undertake our

activities incognito. Siemens is a major corporation in 190 countries, so whatever we are involved with the world knows about it.”

4.2.2 Financing at market terms

A key element of SFS’s success has been the avoidance of a potential trap for captive financiers: that of “adverse selection” in which captives are left to finance deals that cannot attract private investment. Certainly, adverse selec-tion renders a captive-only lender the lender of last resort, which SFS does not consider a sustainable model.

Anthony Casciano, CEO of SFS Project, Structured and Leveraged Finance Healthcare:

“Deals often live or die by the financing structure. And the financing is also vital for cal-culating the Return on Equity of a deal – in fact, its entire

profitability. SFS has to understand the risks and ensure against “adverse selection” by bringing in partner financiers. Of course, at a certain level of risk no price is great enough so we have to discover that level and stay within it. Adverse selection is the graveyard of captive lenders.”

4.2.3 Staying close to the core business

SFS has followed a specific strategic path: first in its creation – with the stated aim of broadly covering all the financial requirements of its parent; and second in its focus – resisting any broadening of its mandate away from supporting the operations of the parent company. And while the role of SFS is expanding – including third-party funding in sectors it understands well – it is important that it sticks to its principles in this respect. The aim is to not diversify into areas that are unrelated to Siemens’ broader business expertise.

4.3 The Siemens banking license

Siemens holds a banking license in Germany. The license expands the range of the financial products that SFS can offer Siemens' customers. In addition, it has enabled Siemens to structure financing solution more inde-pendently from banks – including a broadened range of options for corporates with respect to their cash deposits. This is an important benefit in a “post-crises” environment in which systemic banking risks cannot be ignored.

Legally, Siemens Bank is a wholly-owned subsidiary of Siemens AG with offices in Germany and the UK and a first-time A1/P-1 issuer rating from Moody's Investor Service (outlook stable).




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Mark Roemer, Head of Global Markets, SFS Treasury:

“Via Siemens Bank, SFS can operate more independently from other banks, allowing it to become more flexible and agile in supporting the sectors. It puts SFS in a position to service the business needs of its cus-

tomers via more comprehensive service offerings – e.g. complementing SFS’ structuring capabilities and commercial finance solutions with banking prod-ucts.”

5. Conclusions

5.1. Active participation required

The generally-hardening attitude towards risk – as well as the changing regulatory landscape – has had a major impact on the project and equipment financing markets. Bank funding is becoming more expensive, causing con-straints in the availability of credit. Yet new pools of liquid-ity are becoming available in the project finance arena – for example from specialist funds interested in investing in infrastructure. This is a major change, and one unlikely to prove a passing trend.

However, while this is a fundamental shift in the structure of the financing market – involving long-term shifts in the availability and sourcing of finance – short-term disrup-tions are also causing concern. Indeed, such disruption has resulted – temporarily – in the fertile financial areas for investment capital being divorced from the deepest areas of sector expertise – i.e. those with the funds to invest are

not those with the expertise to assess the risk. There is therefore appetite to invest, but also a caution regarding the inherent risks – not least because the internal (and therefore trusted) analysis of risk is currently absent from the institutions with the greatest appetite to invest.

Of course, such dislocation is likely to be temporary. New investment models and structures will emerge, with the major project sponsors playing an important role in these new structures – perhaps helping to bridge the knowledge gap between the investors and the opportunities.

5.2. Combination of financial and technological expertise beneficial

What is clear is that innovative financial thinking is re-quired – connecting the infrastructure needs with the growing financial power of both the new pools of invest-ment and those captive financing institutions willing and able to finance themselves (and others) due to their high credit ratings and strong balance sheets. Yet this role is not about stepping in where the banks have withdrawn. Companies such as Siemens are also the key providers of technology that can struggle for financial backing in the early stages. This brings financing and technology provi-sion together – with sponsors supporting their own equipment in the early supply and utilization stages of a technology.




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“Financiers and engineers have different instincts – and these instincts complement one another rather than can-cel one another out. Whereas

financiers are likely to be put off by problems, engi-neers are more likely to look for practical solutions, and more often than not have the wherewithal to do so. There is no right or wrong way here – our combi-nation of these characteristics is one of our major strengths, as it leads to a more accurate assessment of risk and project quality.”

5.3. Risk management vital

To allow captive financing institutions to play their full leading role in the future, however, they must develop first-class risk assessment and risk management capabili-ties. Of course, captives have a big advantage in one re-spect: technology assessment. Captives are able to analyze technology risk to a far greater extent than pure financi-ers. Engineering contacts within the company ensure open discussion and a deeper understanding on both the engi-neering and the financing sides that can help generate integrated solutions that work for both. And this helps generate an evaluation capable of giving additional partners comfort.

SFS has developed a sophisticated risk management capa-bility, fully committed to the strong financial profile of Siemens. It pursues a business model that is not overly-aggressive, aimed at strong risk assessment and risk placement. It also has a proven track record as a risk man-ager, in terms of both risk assessment and risk placement.

Peter Moritz, CFO, SFS:

“SFS can and must be selective in assuming risks, which means we have made structur-ing and placement capabilities parallel goals. SFS must there-fore be judged not simply by risk/return criteria, but as a risk manager for the group as a whole.”


“Current market conditions make life interesting for the SFS business model. The crisis has made our role more im-portant, both in helping to manage Siemens’ operational risks in the most efficient

manner and in appropriately placing them into the insurance markets. The beauty of our business model is that SFS has access to all relevant tools from the banking and insurance industries to analyze, miti-gate and/ or eventually finance the group’s risks. There is usually a balance between the risks we can take and the risks we prefer to place. The SFS busi-ness model means it has a certain amount it can in-vest in risk. Our challenge is to use that capacity as best we can – in the most interesting and efficient way for the group.”

5.4. Collaboration key

Another key need is increased collaboration. Captive financial services providers such as SFS bring in, and – where and how necessary – support a wider range of partners. They could be midcap engineering companies in the supply-chain; partner multi-nationals teaming-up for a major infrastructure project; public sector awarding entities; private or institutional investors; insurers; or banks acting as agents, cash managers or distributors of risk to other banks or investors. Via SFS, Siemens is at the hub of this collaboration – bringing parties together in order to forge progress on particular projects.

Yet this makes an important final point. Despite its name, SFS’s role is not always financial or as a liquidity provider. SFS demonstrates its commitment on behalf of Siemens in whatever form is appropriate. The aim is to provide a compelling narrative for other parties to join such collabo-ration. In this respect, the key role for SFS is therefore to inject confidence into this process.

Andreas Schumacher, Head of Strategic Development, SFS:

“The total financing demands of Siemens’ projects exceeds the capacity of SFS, which means – for Siemens – we will always have to place consid-erable volume and risks in the market. The global banks

have unrivalled access to the international capital markets, and that will remain important for SFS. We still need to work with a healthy financial market,






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and with international banks. We need to be smart about the elements of risk and return we retain ourselves, and which part we place in the market.”

6. Methodology This white paper has been prepared mainly through inter-views with key SFS management team executives, direct quotes from whom are included above. The executives were encouraged to offer their personal insights into the current and future landscape of their business area, as well as Siemens as a whole. The interviews followed a questionnaire aimed at ensuring the executives spoke freely about what mattered to them.


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NOTES AND FORWARD-LOOKING STATEMENTS This document includes supplemental financial measures that are or may be non-GAAP financial measures. New orders and order backlog; adjusted or organic growth rates of revenue and new orders; book-to-bill ratio; Total Sectors profit; return on equity (after tax), or ROE (after tax); return on capital employed (adjusted), or ROCE (adjust-ed); Free cash flow, or FCF; cash conversion rate, or CCR; adjusted EBITDA; adjusted EBIT; adjusted EBITDA margins, earnings effects from purchase price allocation, or PPA effects; net debt and adjusted industrial net debt are or may be such non-GAAP financial measures. These supplemental financial measures should not be viewed in isolation as alternatives to measures of Siemens’ financial condition, results of operations or cash flows as presented in accordance with IFRS in its Consolidated Financial Statements. Other companies that report or describe similarly titled financial measures may calculate them differently. Definitions of these supplemental financial measures, a discussion of the most directly comparable IFRS financial measures, information regarding the usefulness of Siemens’ supple-mental financial measures, the limitations associated with these measures and reconciliations to the most comparable IFRS financial measures are available on Siemens’ Investor Relations website at www.siemens.com/nonGAAP. For additional information, see sup-plemental financial measures and the related discussion in Siemens’ most recent annual report on Form 20-F, which can be found on our Investor Relations website or via the EDGAR system on the website of the United States Securities and Exchange Commission.

This document contains statements related to our future business and financial performance and future events or developments involv-ing Siemens that may constitute forward-looking statements. These statements may be identified by words such as “expects,” “looks forward to,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “project” or words of similar meaning. We may also make forward-looking statements in other reports, in presenta-tions, in material delivered to stockholders and in press releases. In addition, our representatives may from time to time make oral for-ward-looking statements. Such statements are based on the current expectations and certain assumptions of Siemens’ management, and are, therefore, subject to certain risks and uncertainties. A variety of factors, many of which are beyond Siemens’ control, affect Siemens’ operations, performance, business strategy and results and could cause the actual results, performance or achievements of Siemens to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements or anticipated on the basis of historical trends. These factors include in particular, but are not limited to, the matters described in Item 3: Risk factors of our most recent annual report on Form 20-F filed with the SEC, in the chapter “Risks” of our most recent annual report prepared in accordance with the German Com-mercial Code, and in the chapter “Report on risks and opportunities” of our most recent interim report. Further information about risks and uncertainties affecting Siemens is included throughout our most recent annual and interim reports, as well as our most recent earn-ings release, which are available on the Siemens website, www.siemens.com, and throughout our most recent annual report on Form 20-F and in our other filings with the SEC, which are availa-ble on the Siemens website, www.siemens.com, and on the SEC’s website, www.sec.gov. Should one or more of these risks or uncer-tainties materialize, or should underlying assumptions prove incor-rect, actual results, performance or achievements of Siemens may vary materially from those described in the relevant forward-looking statement as being expected, anticipated, intended, planned, be-lieved, sought, estimated or projected. Siemens neither intends, nor assumes any obligation, to update or revise these forward-looking statements in light of developments which differ from those antici-pated. Due to rounding, numbers presented throughout this and other documents may not add up precisely to the totals provided and percentages may not precisely reflect the absolute figures. Stand: March 1, 2013

Siemens Financial Services GmbH

SFS SD CC Otto-Hahn-Ring 6 D-81739 Munich Germany

www.siemens.com/finance All rights reserved. All trademarks used are owned by Siemens or their respective owners. © Siemens AG 2013


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