June 30, 2011 / 1:50 PM / 7 years ago

Sino-Forest shares slip on S&P rating downgrade

* S&P cuts Sino-Forest to ‘B+’, puts on watch negative

* Shares fall 4 percent on TSX, then recover

TORONTO, June 30 (Reuters) - Shares of Sino-Forest TRE.TO fell 4 percent early on Thursday, after rating agency Standard & Poor’s cut the embattled Chinese forestry company’s corporate credit rating. [ID:nSPW4DPhxr]

“We downgraded Sino-Forest to reflect our view that the company’s business faces significant challenges due to its inability to collect cash from its China-based timber assets held by offshore subsidiaries, and its sharply reduced access to capital markets following allegations of fraud by Muddy Waters,” said Standard & Poor’s credit analyst Frank Lu.

“While the validity of the allegations is still unclear to us, the ensuing scrutiny has highlighted management’s weak disclosures, particularly regarding its lack of access to operational cash and revenue recognition,” said Lu.

The rating agency said that even if Sino-Forest is cleared of the alleged irregularities, confidence in the company’s management and its business model will be tarnished, and it will likely have limited access to capital markets.

The firm lowered its long-term corporate credit rating on Sino-Forest to ‘B+’ from ‘BB’. The company, which has roughly $2 billion in outstanding debt, has said its cash and cash equivalents were $1.1 billion as of March 31.

Shares of Sino-Forest have fallen more than 85 percent since June 2, when short-seller Carson Block’s firm Muddy Waters accused the company of fraudulently exaggerating the size of its forestry assets.

Sino-Forest has denied the allegations and it has appointed a committee of its independent directors to investigate. But the review is expected to take up to three months, and many investors are so far unconvinced by the company’s rebuttal.

Billionaire hedge fund manager John Paulson, who was for long the largest shareholder in Sino-Forest, last week disclosed he sold his entire 14.1 percent stake.

On June 20 rival rating agency Fitch downgraded Sino-Forest’s long-term foreign currency issuer default rating and senior unsecured debt rating to BB-. [ID:nN1E75J0AK]

Shares of Sino-Forest fell 11 Canadian cents to C$2.56 on the Toronto Stock Exchange before climbing back to C$2.65. (Reporting by Euan Rocha; editing by Janet Guttsman)

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