Bloomberg News

Sino-Forest Expects Default as It Will Miss Earnings Deadline

December 12, 2011

Dec. 13 (Bloomberg) -- Sino-Forest Corp., the timber producer fending off fraud allegations, expects to receive notice of default on the company’s bonds and may consider selling itself after saying it will miss a deadline to report third-quarter earnings.

Sino-Forest won’t make a $9.78 million interest payment on its 2016 convertible notes that’s due Dec. 15, the Hong Kong- and Mississauga, Ontario-based company said yesterday in a statement. There’s no assurance if or when the earnings results will be released, it said.

Sino-Forest said Nov. 15 it would publish its earnings within 30 days and that the delay had breached certain covenants on its senior and convertible notes.

“In these circumstances, the board has determined that it must consider all strategic options available,” Sino-Forest said in the statement yesterday. “The company may consider obtaining other sources of capital, including through the recapitalization of the company or the sale of some or all of its business.” 

Sino-Forest tumbled after short seller Carson Block’s research firm Muddy Waters LLC published a report that said the company overstated its timber holdings in China. The shares slumped 74 percent between June 1, the day before the report came out, and Aug. 25, the last day of trading before they were suspended by Canada’s main securities regulator, which began an investigation. The Royal Canadian Mounted Police also has started a probe.

Report Delay

“It’s just another chapter in this sad tale,” John Stephenson, who helps manage $2.7 billion at First Asset Investment Management Inc. in Toronto, said in a telephone interview. “At some point maybe the creditors could force this into liquidation and try and claim whatever they can from this as a result of this breach.”

The forestry company, which has denied the allegations, formed an independent committee in June to investigate the accusations. Sino-Forest said yesterday the committee’s final report now won’t be issued until 2012, instead of by the end of the year as previously stated.

“It’s not surprising that the company will miss the upcoming interest payment on its debt,” Block said in an e- mailed statement. “It seems that a bankruptcy filing is a real possibility.”

Sino-Forest retained Houlihan Lokey and law firm Bennett Jones LLP as advisers to help evaluate its options.

Bond Price

Bond dealers were offering to buy Sino-Forest’s $600 million of 6.25 percent notes due in October 2017 for 25 cents on the dollar at 4 p.m. yesterday in New York, according to Brownstone Investment Group LLC in New York. That’s down from 35 cents on Dec. 9.

The aggregate principal owed under Sino-Forest’s four series of outstanding senior and convertible notes is about $1.8 billion, the company said in the statement.

The plunge in Sino-Forest’s shares has cost investors about C$3.3 billion ($3.2 billion), according to data compiled by Bloomberg. Hedge-fund firm Paulson & Co., formerly Sino-Forest’s biggest shareholder, sold its entire stake in June following the Muddy Waters report, booking a C$462 million loss.

Other investors bought the shares after the allegations were made, including Singapore-based billionaire Richard Chandler, who acquired stock to become Sino-Forest’s biggest investor, according to data compiled by Bloomberg.

‘Not Wise’

Sino-Forest, which hired PricewaterhouseCoopers LLP to assist with the committee’s probe, will seek permission for the shares to resume trading when it meets the Ontario Securities Commission on Jan. 23, Chief Executive Officer Judson Martin said in an interview last month.

Martin replaced Allen Chan, a co-founder of the company, who stepped down in August along with three other executives.

“It was not wise of Sino-Forest to indicate last month that it would aim to release its earnings by Dec. 15 as it has lost additional credibility by failing to deliver,” Kevin Pollack, a New York-based fund manager at Paragon Capital LP, which invests in Chinese stocks, wrote in an e-mail.

The company published the independent committee’s interim report on Nov. 15, in which the committee said it had confirmed Sino-Forest’s cash balance and obtained information from Chinese forestry bureaus verifying 77 percent of its timber assets.

The committee also said in its interim report that there were missing records. It reported difficulties in obtaining data, a lack of cooperation from some company executives, and an absence of an internal audit function.

Accusations against Sino-Forest have fueled investor concern that financial statements at some Chinese companies are misleading.

Regulators and investors have increased their scrutiny of Chinese companies trading in North America. The U.S. Securities and Exchange Commission began an investigation last year into the use of reverse takeovers, in which a closely held firm becomes public by purchasing a shell company that already trades.

--With assistance from Zeke Faux in New York. Editors: Steven Frank, Simon Casey

To contact the reporters on this story: Liezel Hill in Toronto at; Christopher Donville in Vancouver at

To contact the editor responsible for this story: Simon Casey at

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