TORONTO (Reuters) - Sino-Forest TRE.TO, a China-focused forestry company accused of fraud, will delay reporting its financial results again, putting it in breach of debt covenants and raising the prospect of insolvency proceedings.
The company conceded in a statement on Monday that a review of the fraud charges leveled in June would extend into 2012. It had initially expected a team of its independent directors to present findings by September, but later it said the review would wind up by the end of the year.
Sino-Forest, until months ago the largest forestry company listed on the Toronto Stock Exchange, has been reeling since short-seller Carson Block and his firm Muddy Waters accused it of exaggerating the extent of its Chinese assets. Block alleged that the company had also fabricated certain sales transactions.
Last month, Sino-Forest said the review panel had been able to address and clear the company of many of the allegations, but certain issues remained.
Sino on Monday said the panel was still trying to determine the nature and scope of its relationship with intermediaries and suppliers involved in its land dealings. It is also seeking explanations for issues raised by certain documents, it said, without providing details.
Sino-Forest said its board has decided to delay the third-quarter financial results until those matters are resolved.
Last month, the company warned it was delaying its results, but it indicated it would attempt to file within 30 days to avoid a default. On Monday, it abandoned that timetable.
Block said the latest delay vindicates his position on the company. In an e-mail, Block also said Sino's move raises questions about the panel's preliminary findings, released by the company a month ago. At the time, the company said it found no basis for the short-seller's allegations against it.
In light of the looming default, the company said it has begun discussions with its creditors and its future for now rested on the success of these talks.
"As the company has breached certain covenants under its note indentures, the company's ability to continue as a going concern and avoid insolvency proceedings depends on the success of the company's discussions with its stakeholders," it said.
The company said it has not received any notices of default so far, but it expect to receive them after noteholders are informed that the company is unable to state if or when it expects to release its third-quarter results.
Sino-Forest also said it has decided against making a roughly $10 million interest payment on its 2016 convertible notes that is due December 15, given its current circumstances.
"Failure to make this interest payment on this date will constitute a further breach of covenants under the relevant note indenture," the company warned.
"It's not surprising that the company will miss the upcoming interest payment on its debt," said Block. "As Muddy Waters and others have shown, Sino-Forest has few assets of any real value. The tone of today's release is substantially more sober than that of its November 15 release."
A Sino-Forest spokeswoman could not be reached immediately to respond to Block's comments.
The company said the total principal owing under the four series of outstanding senior and convertible notes is about $1.8 billion. The company also has loan facilities in China totaling $70.5 million.
Sino-Forest said its board has determined it must consider all strategic options available to it, forcing it to consider a recapitalization or sale of some or all of its business.
The company has retained Houlihan Lokey and Bennett Jones LLP as its financial and legal advisors to assist in this process.
"This is a real company with real assets and devoted employees," Sino-Forest Chief Executive Judson Martin said in a statement. "We will do everything within our power to maximize the return to our stakeholders and complete any work that is required."
Martin took the reins at Sino-Forest in August, after long-time Chairman and CEO Allan Chan stepped down. Chan resigned after the company's beleaguered stock was cease traded by Ontario regulators, pending the completion of a probe into the company.
Reporting By Euan Rocha; Editing by Frank McGurty