Sino-Forest structure leaves bondholders facing wipeout

Thu Dec 22, 2011 4:22am EST
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By Rachel Armstrong and Umesh Desai

(Reuters) - It's tough enough for offshore creditors of Chinese firms to get their money back when businesses run into trouble. The complex corporate structure of Chinese timber firm Sino-Forest TRE.TO could make it tougher still for its bondholders.

The company, which was set up 16 years ago and lists its shares in Toronto, this week received a default notice on two of its bonds after it failed to file third-quarter results on time.

That followed its decision to not make a $10 million interest rate payment on one of its bonds, a move that fixed income experts saw as a sign that bondholders could face a near-100 percent writedown.

"I'm shocked as to why the installed management would decide to default on a coupon payment, it doesn't benefit any of its stakeholders and dissuades its customers from continuing to do business," said Scott Bennett, head of Asia Credit at Aberdeen Asset Management, which sold all its Sino-Forest bond holdings more than two months ago.

Sino-Forest has been under pressure since Carson Block at short-seller Muddy Waters accused it six months ago of fraudulently exaggerating the size of its forestry assets.

The saga is the most prominent of a series of accounting scandals to taint the image of Chinese companies listed in North America, prompting trading halts, delistings, lawsuits and regulatory probes. Sino-Forest's market value has slumped 75 percent to below $1.2 billion and high-profile investors have fled, including billionaire hedge fund manager John Paulson.

Its bondholders have included some of the world's biggest asset managers including Fidelity, whose Asian high yield fund and global high yield funds between them held some $70 million of the company's 2017 bonds at end-October, according to eMAXX, a Thomson Reuters company.

The company denies the allegations, and an independent committee last month found no evidence of fraud, although it did say it was unable to verify all of the company's forest holdings.   Continued...