Sino-Forest runs low on cash, bonds suggest default
Sino-Forest, the private equity-backed forestry firm that last week issued a report denying short-seller claims that it is engaged in a massive fraud, is still in danger as its bonds trade at prices that imply an extremely high risk of default. The negative sentiment can be traced back to Sino-Forest’s dwindling cash balance, which stands at $206 million compared to over $600 million at the start of the year.
"It's not quite as important now whether the company is a total fraud or not," Owen Gallimore, Asia credit analyst at ANZ, told The Financial Times. "As time goes by, cash is being whittled down to alarmingly small amounts. There are big question marks over the business, its actual operating model. This isn't suddenly going to turn into a company that's generating cash flow."
Although Sino-Forest says it has sufficient liquidity to meet near-term obligations, investors were not encouraged by the delay of third-quarter results due last week to allow more time to verify information about the company's suppliers and customers.
In June, short-seller research firm Muddy Waters claimed that Toronto-listed Sino-Forest overstated its revenues and assets by routing funds off its books to intermediaries in order to fabricate sales transactions. It called Sino-Forest the "granddaddy of China RTO frauds," and the news prompted shares in the company to drop approximately 80%.
The company denied any wrongdoing and asked an independent committee to investigate. Towards the end of August, Sino-Forest's chairman and CEO resigned and three employees were suspended after the Ontario Securities Commission said the company may have misrepresented its revenue statements and exaggerated its timber holdings. It added that Sino-Forest "appears to have engaged in significant non-arm's-length transactions."
Paulson & Co. exited its holding in the company in June, supposedly incurring a loss of more than $500 million. Meanwhile, Mandolin Fund, which is controlled by New Zealand-born billionaire Richard Chandler, has sought to capitalize on the low share price, building up an 18% stake in July and August.
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