Automatic Cocos Conversion vs. Voluntary Restructuring

Reaching agreement on voluntary restructuring is much more costly and time consuming than converting bailinable debt into common stock. To illustrate the difficulties and losses that arise, the recent restructuring of a non-financial company, SolarWorld AG, can serve as a case in point that you do not have to be a financial company to benefit from having cocos on the balance sheet. Once Germany's largest solar producer, this public company has operations in a number of countries; it had even boasted of having America's largest and most advanced solar photovoltaic [PV] production facility (in Hillsboro, Oregon). Like most of its competitors, the company had been struggling with declining sales and with operating losses that escalated in 2013. Early in the year it started meetings with three groups of creditors holding promissory notes and loans, and two publicly traded bonds: (i) 7-year bonds or global notes totaling €400 million issued in January 21, 2010 at a fixed coupon rate of 6⅛%, and (ii) 5-year bonds totaling €150 million issued July 27, 2011 with a 6⅜% coupon. These two bonds could conceivably have been issued as cocos with a simple 10% leverage ratio trigger defined as book equity in percent of total balance-sheet assets. Such a trigger level would be very low for firms in most non-financial sectors; it was 27.5% (614.6/2,235.8 with data in millions of euros) for SolarWorld (2013, p. 40) as recently as January 1st, 2012…