Inefficient Markets – Solon SE edition: Shorting to Zero

One of the “ineffecient” corners of the stock markets are definitely penny stocks, in particular stocks of bankrupt companies.

A very good example is currently Solon SE, the once highflying German solar panel manufacturer.

Solon became bankrupt in mid December 2011. The stock dropped already a lot before:

However, after the news that an Indian company might be interested in some of the assets, the share price went up from around 0,23 EUR to 0,30 EUR, giving the shares a market cap of around 5 mn EUR.

Before going into the liquidation value anaylsis, we should look at the debt structure. Solon has created a lot of debt in the last years, in total around 400 mn in loans and bonds. Solon has one listed bond outstanding, a Convertible Bond from 2007 which would have matured end of 2012. Total outstanding amount is 132 mn EUR.

This bond is trading at 4% (!!! not 40%) of nominal value.

So in order for the shareholders to see a single cent of any liquidation proceeds, the bondholders will have to be paid in full. The likelyhood for this happening seems to be extremely low according to the bond price. The reason for this is that most of the asstes have been pledged for the bank loans after a debt restructuring in 2010.

One could now anaylse if the bond is correctly valued, but after any metric, the recovery rate for the bond will be significantly below 100%, which means the shareholders will get nothing.

So why on earth is someone willing to pay 30 cents for something thatr is worth nothing ? There are some theories about option value, but in my opinion the reason is most likely ignorance and “animal” spirits.

Fundemantally, Solon SE is a stock one can safely short down to zero, provided one can stand the volatility. For the portfolio I will initiate a short position of max. 2% from today, again following the 20% VWAP rule.

Edit: I have looked at the funding structure and my conclusion is that also the bond is a ZERO, but I would not want to bet on it. The safe bet is the stock.


  • winter, Janhendrik,

    you are both right. One has to be sure to have a “safe” borrow, otherwise it becomes unpredictable.

    there is an intersting US guy who succesfully shorts penny stocks

    So it might make sense as a specialised strategy. It might also might make sens to do more empiric studies on bankrupt companies before actually starting this.


  • opty,

    shell trading is for sure still active, but you cannot use the tax losses any more. So an empty shell is worth maybe 100-300 k after everything is liquidated.


    P.S. The language is english because there are a increasing number of non-german speaking readers.

  • winter, you are very right. vola is so bad when you are short since having your borrow called off (and that does happen on a regular basis) gets horribly costly when stocks jump around. Call it inverse cost-average, if you like 🙂

  • Well, there are a lot stocks of bankrupt companies out there, and sure a lot of them are zombies with no chance of recovery? Maybe it’s due to the missing possibility to short the stocks, but a lot of them seem to be quoted at far too high prices – well, actually, compared to zero, any price is “far too high”. The problem is, that the volatily of these stocks is very high, and even if there is absolutely no chance of recovery, these stocks can increase tenfold or more. That’s because of the mad crowd that’s trading in such stocks. Sometimes, such stocks are used by scammers. I have seen the craziest things… so I surely wouldn’t want to take that risk, that could actually ruin you! If you sell 2% of your portfolio, you can win these 2%, but it’s possible to lose 20% (until you sell, because you cannot stand it anymore).

    I regard such stocks as a playground for gamblers – in both ways, long and short. I have reflected a lot about the “safe bet” to sell bankrupt stocks, which eventually will be down to zero, and I don’t think that the fundamentals really matter and that it is a free lunch, and therefore I don’t believe that Solon is anything special.

    One more question: What happens to short positions after the delisting? Will you still have to deliver the stocks? That could also explain some of the erratic fluctuations – or just the presence of short sellers at all.

  • Thanks for your quick answer. The shell trading is still in use. You can finde an interesting article in wikipedia.
    JanHandrik thanks for the information, i didnt see that point.
    If nobody borrow his share to you, you can not go short. In this last Point was my last Idea an CFD trade, but I think the cost for the time are to high.
    may i ask a question? Why is the blog language englisch and not german?

  • Opty-value: the incremental gain at DE000CM32AH4 is very small in comparison to the capital outlay. You basically have to invest 9,70 to get 10 in the case of delisting. During the wait, you take counter-party risk and finance expenses.

    It’s actually a great way for banks to get cheap deposits in the form of “Mini-Futures” etc. as they do have to invest capital to hedge in the backbook.

  • Ein Grund warum man für Solon SE noch Geld bezahlt, sind Mantelkäufe mit Verlustvortrag.
    Diese Zertifikat ist mir ins Auge gesprungen DE000CM32AH4. Würden Sie es damit machen?
    Sorry for my German but I thinke you are German too.

    • hallo,

      ich denke man kann die Verlustvorträge nicht so ohne weiteres nutzen, dieses einfache Modell wurde m.E: schon relativ lange vom Fiskus “gekilled”.

      Da smit dem Zertifikat ist leider nicht so reizvoll, weil ich da keinen Hebel habe. Ich muss 9,80 bezahlen und bekomme irgendwann 10, also maximal 2% rendite. Beim Short kann ich das im Prinzipp ohne Kapitaleinsatz machen.


  • but where do you find the borrow? I checked interactive brokers this morning, they will only let you short 100 shares. (apparently no more available)

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