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Sino-Forest CDS payout determined, asset value still unknown

Sino-Forest headquarters in Guangzhou, Southern China, June 29, 2011. The scandal-plagued forestry company is under investigation, and on Tuesday, a number of other publicly listed Chinese companies failed to meet the U.S. deadline for reporting results.

Adam Dean for The Globe and Mail/adam dean The Globe and Mail

Investors and speculators on the receiving end of Sino-Forest's credit default swaps, which act as insurance on the company's bonds, will be paid 71 cents on the dollar for their holdings.

The payout ratio was determined Wednesday through an overseas auction triggered by the International Swaps and Derivatives Association's ruling that Sino-Forest's CCAA filing counted as a bankruptcy credit event.

During the auction, 12 dealers submitted bids and offers, and the auction closed on a final price of 71 cents on the dollar based on a net open interest of $36-million (U.S.) to sell. A detailed explanation of how these credit event auctions work lives here.

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Because the participating dealers were based in Hong Kong and Singapore, the auction was the first to be conducted to settle CDS trades outsider of North America, Europe and Japan.

Even though the auction results are final, it's worth noting that the dealers were more or less speculating on what the bonds were worth, which is very hard to determine because that depends on the value of the company's assets. After a thorough investigation, even Sino-Forest's independent committee couldn't do this.

Though it seems like a simple task, verifying the rights to timber in China is an extremely complicated process because Sino-Forest can only hold the right to use the land, as proven by plantation rights certificates – not own the land outright. This forced the committee to verify the holdings through "confirmations," or letters that say Sino-Forest owns the rights. It couldn't get its hands on the original documents.

This particular issue was very troubling for the Ontario Securities Commission from the get go. "The OSC expressed grave concerns as to such absence and surmised in its discussions with the independent committee that such absence is per se evidence of fraud," the independent committee said in its second report to the board back in November.

The credit auction was conducted by Markit and Creditex, a subsidiary of the IntercontinentalExchange.

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About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

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