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Moody's withdraws Sino-Forest rating on "high likelihood of default"

Last updated: 11:56 14 Dec 2011 EST, First published: 12:56 14 Dec 2011 EST

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Moody's Investors Service Wednesday downgraded and withdrew its rating on Chinese tree plantation group Sino-Forest Corp. (TSE:TRE).

The move comes after the company delayed the release of its third-quarter earnings for a second time on Monday, triggering a breach in certain senior debt covenants that could potentially push the firm into insolvency.

Wednesday afternoon, Sino-Forest shares were flat at $4.81.

The ratings agency cut its rating on Sino-Forest to "Ca" - reflecting the "high likelihood of default" and the low level of expected recovery for bond holders in case bond repayments are accelerated - from "Caa1" and then withdrew the rating, citing it has "insufficient or otherwise inadequate" information to support the maintenance of the rating.

Moody's analyst Jiming Zou said: "The ratings downgrade follows Sino-Forest's announcement that its board has decided not to make the $9.775 million interest payment on the 2016 convertible notes due on December 15, 2011.

"This action implies that Sino-Forest will default on this debt obligation, if it does not rectify the payment after the 30-day grace period from the due date."

Sino-Forest, which was the largest forestry company listed on Toronto's main market before its shares sunk in June, was accused of exaggerating its tree plantation assets in China.

The accusatory report prompted an investigation into the company's operations by regulators, leading to a delisting of its shares pending investigation results. Recently, the RCMP also commenced an investigation.

An independent committee was appointed by Sino-Forest to examine the allegations in the Muddy Waters report, with independent legal counsel retained in Canada, Hong Kong and mainland China.

Sino-Forest's business encompasses several different activities, including plantation fibre operations, referred to as the tree plantation business, wood log and wood products trading operations and a manufacturing business.

The push back of its third quarter results Monday follows the first delay announcement in mid-November, which said the company would make efforts to release the third quarter report within 30 days, by December 15.

Sino-Forest's failure to file the third quarter results by December 15 breaches certain senior and convertible debt covenants, it said.

A default will result if the company fails to correct the breach within 30 days for its senior notes, and within 60 days for its convertible notes after having received written notice.

Under the current circumstances, the company's board has decided not to make the US$9.77 million interest payment on the 2016 convertible notes that is due on December 15, constituting a further breach of covenants.

In a statement issued Monday, Sino-Forest said: "In these circumstances, the board has determined that it must consider all strategic options available to the company.  The company may consider obtaining other sources of capital, including through the recapitalization of the company or the sale of some or all of its business."

Sino-Forest's shares have plunged 74 percent since June 1, the day before Muddy Waters alleged the company overstated its timber holdings. On August 25, the day prior to the stock suspension, Sino-Forest was trading at $4.81. The scandal prompted the resignation of former chairman and CEO Allen Chan in August.

The company is also the subject of a $6.5 billion class action lawsuit filed in mid-June by Ontario law firms Koskie Minsky LLP and Siskinds LLP. In the summer, well-known US money manager John Paulson took a loss on his stake in Sino-Forest, as his $37 billion Paulson & Co. hedge fund firm sold its entire holding of 34.7 million shares, or around 14 percent of the company.

Meanwhile, the Ontario Securities Commission's investigation is ongoing and its cease trade order on the company's securities remains in effect.

The aggregate amount of principal owing under the company's four series of outstanding senior and convertible notes is approximately $1.8 billion. In addition, as of September-end, Sino-Forest had loan facilities in China totaling $70.5 million.

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