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Sino-Forest hit with default notices from note-holders

Staff are seen at the Sino-Forest and Sino-Panel China headquarters in Guangzhou, Southern China on June 29, 2011.

Adam Dean/adam dean/The Globe and Mail

Sino-Forest Corp., already reeling from fraud allegations, has been slapped with default notices from debt holders, a setback that could mark the beginning of the end for what was once Canada's largest publicly traded forestry company.

Sino-Forest management, including its Canadian chief executive officer Judson Martin, are now pleading with debt holders not to tip the company into insolvency. The TSX-listed Chinese timber firm had less than $600-million (U.S.) in cash in early November and more than $1.8-billion in debt.

Mr. Martin, a former executive of one-time Canadian entertainment giant Alliance Atlantis Communications Inc., has less than a month to persuade a majority of Sino-Forest's debt holders to waive their rights to declare the company in default.

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Sino-Forest is asking for more time so it can restructure and is considering selling assets, or the entire company, to avoid insolvency. It has formed a directors' restructuring committee to help manage the process.

The dire situation marks a dramatic fall from grace for a company that, as recently as March, boasted a market value of more than $6-billion and was a Canadian market darling. With help from top Bay Street firms, Sino-Forest raised billions from investors by promising rapid growth from China's soaring demand for wood.

But a scathing research report issued in June by short-seller Carson Block and his firm Muddy Waters LLC, which called Sino-Forest an elaborate, long-running fraud, caused the company's shares to collapse, wiping out more than 70 per cent of their value. Sino-Forest has denied wrongdoing, and no allegations have been proven.

Sino-Forest is unable to file its third-quarter financial results because its own investigators have failed to unravel the tangle of potential related-party transactions with its suppliers and the brokers who sell the company's trees to customers.

Without financial results, the company, which is based in Mississauga and headquartered in Hong Kong, has breached its debt covenants. Certain holders of notes due in 2014 and 2017 served Sino-Forest with written notices of default on Dec. 16.

"The company does not expect to be able to file the Q3 results and cure the default within the 30-day cure period," Sino-Forest said in a statement.

Sino-Forest's directors have now shifted focus, from trying to complete a report addressing the fraud allegations first raised by Muddy Waters, to keeping the company afloat. Sino-Forest chairman William Ardell, who led a committee of directors probing the company, is now also heading the restructuring committee.

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If Sino-Forest fails to win the support of a majority of its debt-holders within 30 days, its collapse would mark the largest-ever default of Asian corporate bonds. Despite the fact that the value of Sino-Forest's bonds have sunk to less than 25 cents on the dollar, distressed debt funds, which usually pile in to troubled companies in hopes of earning a return on a restructuring, are understood to be avoiding Sino-Forest. One source who had canvassed such "vulture funds" said these investors were not interested in buying Sino-Forest's debt because of the difficulty valuing the company's assets.

The Ontario Securities Commission, which in August levelled fraud allegations against executives and suspended Sino-Forest shares from trading on the TSX, has raised "grave concerns" that only 18 per cent of Sino-Forest's timber assets have actual plantation rights certificates that prove legal title in China.

Anticipating a default, Sino-Forest's two largest shareholders have turned against the company. Richard Chandler Corp. of Singapore, which owns almost 20 per cent of the stock, has called for Sino-Forest's directors to resign and for Mr. Martin to be sacked.

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About the Author
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

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