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Sino-forest operations in China.The Globe and Mail

Sino-Forest Corp. is in a desperate race to stave off collapse.

Dogged by allegations, investigations and a looming default on its debt, the company warned Monday it is considering "all strategic options" available, including raising capital or selling some or all of its assets. It is already in talks.

"As the company has breached certain covenants under its note indentures, the company's ability to continue as a going concern and avoid insolvency proceedings depends on the success of the company's discussions with its stakeholders," Sino-Forest said in a statement.

"Those discussions will be a key element in determining the future of the company and the courses of action available to it."

Troubling connections between Sino-Forest and its key business partners in China are preventing the company from releasing its financial results. Sino-Forest, once Canada's largest publicly traded forestry company before a short-seller levelled sensational fraud allegations against it in June, said it is likely to be pushed into default by its debt holders, a development that would put the company on the brink of insolvency.

Sino-Forest had previously said it would release its third-quarter financials this week, and a committee of directors was expected to complete its report on the fraud allegations by the end of the year.

But the company said Monday the committee still can't determine the nature of the murky relationships between Sino-Forest and the middleman operations who supply it with timber assets as well as the brokers who eventually sell the trees.

A default on the company's $1.8-billion in debt would set off a cascade of debt obligations for the scandal-plagued TSX-listed company, which reported $571-million in cash in early November. The Ontario Securities Commission halted trading in Sino-Forest shares in August after accusing management of engaging in apparent fraudulent activity. The RCMP is also investigating. No allegations have been proven.

Troubling connections have been uncovered between Sino-Forest and its key business partners suggesting potential related-party deals. A number of top Sino-Forest executives, including co-founders Allen Chan and Kai Kit Poon have had links to a key timber supplier called Huaihua Yuda Wood Co. Ltd. Mr. Chan and Mr. Poon once controlled the holding company that now owns Yuda Wood and some Sino-Forest employees have worked for both firms, some at the same time.

Such links, some of which were uncovered by Globe and Mail investigations into the company's operations, raise questions about whether Sino-Forest bought and sold trees at fair-market value and are at the heart of the board's inability to release the third-quarter financial results. The company conceded the true nature of these relationships may never be known.

"There is no assurance that the company will be able to release the Q3 results," Sino-Forest said in a statement Monday. "The circumstances that could cause the company to be unable to release the Q3 results could also impact the company's historic financial statements."

Mr. Chan resigned as chairman and CEO following the OSC allegations. New chief executive officer, Canadian Judson Martin, is now trying to strike a deal with debt holders to avoid insolvency for the company which first listed on Canadian stock markets in 1994 and once boasted a market value of more than $6-billion.

The company said it will not make a $9.775-million (U.S.) interest payment on its 2016 convertible notes that is due on Dec. 15th. Sino-Forest said missing the interest payment would constitute a "further breach" of its debt covenants. With the expectation that debt holders will push it into default, Sino-Forest said it may try and sell assets, or the whole company, to raise cash.

"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 said.

In the event of insolvency or liquidation, Sino-Forest's bond holders will be positioned ahead of shareholders hoping to get some of their money back. Sino-Forest shares plunged more than 70 per cent in June after short-seller Carson Block and his firm, Muddy Waters LLC, called the Mississauga, Ont.-based and Hong Kong-headquartered company a fraud which used related-parties to "fabricate sales transactions."

Sino-Forest on Nov. 15 claimed that an interim report by the director's committee largely exonerated the company and refuted the Muddy Waters allegations. However, the report highlighted a slew of questionable links between Sino-Forest, its executives and the company's business partners. The report said investigators had received insufficient co-operation from Sino-Forest management as well as suppliers and timber brokers, in trying to determine the nature of these relationships.