Bloomberg News

Sino-Forest Defaults on Two Bond Issues, Seeks Waivers

December 20, 2011

(Updates with fund manager’s comments in ninth paragraph.)

Dec. 19 (Bloomberg) -- Sino-Forest Corp., the Chinese timber company fending off fraud allegations, defaulted on two sets of bond payments and said it may consider seeking creditor protection.

The company received notices of default on Dec. 16 on senior notes due 2014 and 2017 after failing to publish its third-quarter financial results in a “timely manner,” Sino- Forest said yesterday in a statement. The company, which said last week it expected to receive the default notices, said it’s now seeking waivers from bondholders.

Sino-Forest dropped 74 percent in Toronto trading after Carson Block, a short seller, said in June the company had overstated its timber assets in China. The company, with $1.8 billion in outstanding bonds, has been suspended from trading since August and denies the allegations.

“If Sino-Forest actively contacts their bondholders, then they should accept some discount on the repayments,” said Ka Kei Lam, an investment manager at Redford Assets Management Ltd. in Hong Kong. “If the company is willing to settle the bond issues, it shows they have the financial power to do it. Bondholders are afraid that the company will collapse.”

The notices give Hong Kong- and Mississauga, Ontario-based Sino-Forest 30 days to rectify the situation, which the company said it doesn’t expect to be able to do. Greenheart Group Ltd., a unit of Sino-Forest, declined 7.9 percent in Hong Kong, its lowest close since Nov. 14.

Restructuring Committee

Sino-Forest has formed a special restructuring committee of directors that are independent of management to assess and manage the company’s options, it said in yesterday’s statement.

The company is considering options including recapitalization, selling assets or the whole business as well as creditor protection “or other insolvency-related proceedings,” it said.

Chief Executive Officer Judson Martin said last month that the company was considering options including going private.

It will be difficult for Sino-Forest to continue in its current form, Eric Yan, who helps manage about C$2 billion ($1.93 billion) at Matrix Fund Management Inc. in Toronto, said in an e-mail today.

“The company has lost financing capability from North American markets, which is a must for its capital-intensive yet cash flow-short business model,” Yan said. “The ideal outcome for the company, if it truly owns some assets as it claims, would be privatization.”

‘Any Available Remedy’

Failure to win bondholder agreement to withdraw the notices will mean owners of at least 25 percent of a bond issue can demand immediate payment of the principal and interest, the company said yesterday. Creditors can then “pursue any available remedy” to collect their money, Sino-Forest said.

A trustee for the holders can seize collateral pledged by the company in respect to the senior notes, Sino-Forest said.

Richard Chandler Corp., the biggest shareholder in Sino- Forest, said Dec. 14 the company should reconsider its decision to miss bond payments, and a day later said the company should appoint new board members and replace its CEO.

Sino-Forest’s second-biggest shareholder, Davis Selected Advisors LP, said last week it was “shocked” by Sino-Forest’s failure to make the payment on its bonds. Davis said it holds more than 17 percent of the company’s shares.

‘Likelihood of Default’

Moody’s Investors Service said Dec. 14 it will withdraw ratings for the company after downgrading the company’s debt to Ca, which reflects a “high likelihood of default and the low level of expected recovery for bondholders in case bond repayments are accelerated.”

The Ontario Securities Commission halted trading in Sino- Forest shares on Aug. 26 and said officers and directors at the company may have engaged in acts “related to its securities” that they “knew or should have known” perpetuated a fraud. In September, the OSC extended the trading ban to Jan. 25.

Sino-Forest said Nov. 15 its third-quarter earnings would be released within 30 days and then failed to do so. The delay breached certain covenants on its senior and convertible notes, and the company said Dec. 12 it expected to receive notices of default as it further delayed the earnings.

“It seems that a bankruptcy filing is a real possibility,” Block said in a statement on Dec. 12.

--Editors: Steven Frank, Will Wade

To contact the reporters on this story: Liezel Hill in Toronto at lhill30@bloomberg.net; Yuriy Humber in Tokyo at yhumber@bloomberg.net

To contact the editor responsible for this story: Steven Frank at sfrank9@bloomberg.net


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