TORONTO (Reuters) - Richard Chandler Corp, the largest shareholder in China-focused timber company Sino-Forest TRE.TO, slammed the beleaguered company’s plan on Wednesday to trigger a debt default by failing to make a $10 million interest payment on its convertible notes.
Sino-Forest, until months ago the largest listed forestry company on the Toronto Stock Exchange, has been reeling since June, when short-seller Carson Block and his firm Muddy Waters accused it of exaggerating the extent of its Chinese assets.
Earlier this week, the company said it would delay reporting its financial results yet again, putting it in breach of certain debt covenants. Given the circumstances, Sino said its board has decided not to make the interest payment due on December 15, raising the prospect of insolvency proceedings.
The statement came only a few weeks after the company said a preliminary investigation by independent reviewers had shown no evidence of fraud.
Sino-Forest is one of numerous North American-listed China-focused companies to be mired in fraud allegations this year. The scandals have led to a number of cease-trade orders, lawsuits and regulatory probes.
Singapore-based Richard Chandler, which through its Mandolin Fund owns 19.5 percent of Sino’s outstanding shares, said it was disappointed with Sino-Forest board’s decision to not make the interest payment on the 2016 convertible notes.
“Sino-Forest has generated profitable growth since 1994 and the Richard Chandler Corp continues to have confidence in the underlying business of Sino-Forest,” the firm said in a brief statement.
Alan Kelly, a senior adviser to the fund, which is run by New Zealand-born billionaire Richard Chandler, called Sino’s board decision “disappointing and regrettable.”
“In view of its strong cash reserves and liquidity, and excellent bond repayment track record, we urge the Sino-Forest board to reconsider meeting its bond commitments, as it has always done,” said Kelly.
Chandler’s fund stands to lose at least $140 million and possibly much more, if Sino becomes insolvent. Based on public record, the fund paid roughly C$140 million for slightly less than half its Sino-Forest holdings.
The fund, which owns 47.95 million Sino-Forest shares, did not disclose how much it paid to acquire its initial 26.7 million shares in the company.
Chandler’s plea came just hours after rating agency Moody’s withdrew all its ratings on Sino-Forest.
The move immediately followed Moody’s downgrade of Sino’s corporate family and senior unsecured debt ratings to ‘Ca’ from ‘Caa1’ because of its decision not to make the coupon payment.
Sino-Forest’s total principal owing under four series of outstanding senior and convertible notes is about $1.8 billion. The company has also said it has loan facilities in China totaling $70.5 million.
Sino-Forest’s bonds continue to trade at deeply distressed levels, which investors say represents an approximate value of the company’s liquid assets, although there is no certainty about their realizable worth.
Its bonds due 2014 and 2017 are quoted at 21/25 cents on the dollar compared with last week’s 30/40 range. These bonds were trading at 92 cents on the dollar when Muddy Waters’ report surfaced in June.
Regulators have cease-traded Sino-Forest’s Toronto-listed shares, pending the completion of an investigation into the company. The shares had fallen more than 75 percent this year, before being halted by regulators in late August.
The company is also facing possible class action lawsuits from shareholders in both Ontario and Quebec.
Reporting By Euan Rocha; editing by Rob Wilson