Sino-Forest expected to default on $1.3b in debt

Sino-Forest bonds due in October 2017 and worth a total of $00 million were trading at $0.31 on the dollar on Monday, down from $0.44 at the end of last week. Bonds due in 2014 were trading at $0.32, down from $0.55. On Monday, Moody's cut its rating on Sino-Forest debt from "B1" to "Caa1." Standard & Poor's reduced the company from "B" to "CCC," and then withdrew ratings altogether, citing insufficient information.

Anissa Lee, a credit analyst at Nomura, told The Financial Times that investors are now looking at the company's debt from a recovery rather than a yield perspective. However, recovery efforts could be complicated by the fact that Sino-Forest's cash - $899 million as of June - and most of its assets are located in mainland China. Foreign bondholders do not have direct security over onshore assets.

The departure of Allen Chan, chairman and CEO, plus the temporary suspension of three other employees, came after the Ontario Securities Commission said on Friday that Sino-Forest may have misrepresented its revenue statements, exaggerated its timber holdings and engaged in potentially illegal related-party transactions.

The company has been under attack from short sellers since June when Muddy Waters accused it of fraud. Although Sino-Forest denies any wrongdoing and has asked a committee of independent directors to investigate the matter, its stock has lost 72% of its value since the start of year.

Hedge fund Paulson & Co. exited its stake in the company in June, citing uncertainty over public disclosures and financial statements. However, Mandolin Fund, which is run by New Zealand-born billionaire Richard Chandler, has increased its holding in the company in recent weeks. The fund now owns 18% of Sino-Forest.

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• Topics
• Greater China
• Industrials
• Credit/Special Situations
• Regulation
• Paulson & Co