Distressed debt / bankcruptcy – Solon AG Convertible

Two days ago, Solon AG, a German manufacturer of Solar panels filed for insolvency.

Solon has a convertible bond outstanding, which traded at around 6% of Nominal value before it has been suspended.

Negative cashflow, huge losses, shrinking sales combined with a massive short term debt load´are not a great combination to survive a cyclical down turn.

Also not surpisingly, after writing off a lot of “hot air” in the balance sheet, Solon reported negative net equity of more than 100 mn EUR in Q3.A quick look into the Q3 report shows, that this was not really a big surprise.

A further look into the half year report shows a huge amount of intangible assets which have now been written of to a certain extent.

The balance sheet as of Q3 shows roughly the following amounts:

Total debt 570 mn EUR

Assets:

Cash 12 mn
Receivables 170 mn
Inventory 96 mn

Property, plant 100 mn
others LT 85 mn

If we discount receivables and investory with 50% as well as Property and plant, leave cash at 100% and the rest at 0% we would end up with roughly

12+ 0.5* (176+96+100)= 198 mn EUR Assets or 35% of outstanding debt.

So in theory, buying thr convertible at 6% might be interesting, but unfortunately Solon will not stop its loss making and cashflow negative production right now. The time factor here seems to be quite important and honestly I have to find a way to evaluate this further.

In any case, a detailed analysis of the documentation of the bond has to be analysed.

Also one would have to explore deeper if Property or inventories are pledged to banks so that the bond would become effectively subordinated.

One interesting point in the bond documentation is the fact that the bond hat the same kind of “Change of control” Poison Pill as the Praktiker Bond.

I am not sure if anyone would have been interested anyway in Solon, but paying out the bondholders after a take over seems to be a very good reason to wait for Insolvency proceedings.

Summary: For the time being I will follow the Solon bond rather from a “learning” point of view as I have no direct experiece in actual bancruptcy proceedings. It will be however an interersting case to watch. The frist learning experience however is thath even on a very low basis, the Insolvency news still led to a further decrease in the bonds price despite not being such a big surprise.

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