Carlyle-backed China Forestry set for restructuring

The company had already postponed payment by one month on the senior notes, which are due in 2015 and have a half-yearly 10.25% coupon. China Forestry said in a statement it was "considering various options ... to restructure its indebtedness." Though in default, the company has yet to receive demands for the immediate repayment of the outstanding principal amount of the notes from the trustee or holders.

China Forestry previously offered to buy back the notes in an effort to reduce its interest expenses but has yet to reach the 80% acceptance threshold required for the deal to go through. The notes have been trading at a deep discount.

Carlyle Asia Growth Partners III invested $55 million in China Forestry in two transactions from January 2008 and it held a 10.96% stake at the end of the 2012. Partners Group invested $30 million alongside Carlyle and has a 5.40% stake.

The company has been suspended from trading since January 2011 as it tries to rebuild its business following the emergence of significant financial irregularities. China Forestry admitted in 2012 that it had records of only RMB8.8 million ($1.39 million) in revenue for the three years through 2010, far lower than the RMB2.4 billion previously disclosed.

An investigation found that former CEO Li Han Chun and his team had been using the sales proceeds from China Forestry's primary mainland subsidiary to buy forest assets from farmers and to cover operating expenses related to harvesting activities. They falsified all the records to deceive the auditor.

China Forestry's disclosed assets increased nearly six-fold to RMB9.6 billion between 2007 and 2009 but this was followed by a RMB2 billion write-down and a RMB2.7 billion loss in 2010. In 2011, the net loss widened to RMB4.19 billion as the company took a RMB2.9 billion hit for changes in the value of plantation assets.

A lack of clarity over land ownership hasn't helped. Several years ago China's forestry bureaus sold off land use rights relatively cheaply in order to raise funds. This distorted the forestry business model and companies, under pressure to boost assets, responded by approaching individuals who were awarded land use rights as part of the privatization drive. There is no central land registry with details of who owns what.

China Forestry was still feeling the impact in 2012, with 45,000 hectares of forests written off because there were no ownership certificates. This contributed to a RMB858.2 million charge for changes in the value of plantation assets, resulting in a net loss for 2012 of RMB1.18 billion.

The situation appears to be stabilizing. China Forestry posted a net loss of RMB90.2 million in the first half of 2013, compared to a deficit of RMB103.6 million a year earlier, as turnover jumped 173% to RMB101 million. However, the company made RMB61.9 million in interest payments on the senior notes in the first half of the year, while cash and bank balances stood at RMB236.2 million.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Restructuring
• Industrials
• Greater China
• Distress
• China
• The Carlyle Group
• Partners Group
• Agriculture