Sino Forest’s Greenheart Falls in H.K. on Default Warning

Greenheart Group Ltd., the timber merchant controlled by Sino-Forest Corp. (TRE), fell the most since September in Hong Kong trading after its Toronto-listed parent said it will default on a bond payment due tomorrow.

Greenheart declined 26 percent, the most since Sept. 27, to 74 Hong Kong cents at the 4 p.m. close of trading. The stock has dropped 74 percent since June 2, when short-seller Carson Block accused Sino-Forest of overstating its timber holdings.

Sino-Forest notes are trading at levels indicating that bondholders may lose their entire investment after the company said on Dec. 12 it will default on a portion of its $1.8 billion in debt. Greenheart’s management and operations are independent of Sino-Forest and business will continue as normal, the Hong Kong unit said in a statement today.

“Greenheart’s operations may be affected,” said Ka Kei Lam, associate director at Redford Securities Ltd. in Hong Kong.

Greenheart hasn’t been asked to repay a $40 million loan to its parent and it hasn’t breached any covenants that would trigger an early repayment, it said.

Sino-Forest’s shares have been suspended from the Toronto Stock Exchange since August by Canada’s main securities regulator, which began an investigation. The Royal Canadian Mounted Police also has started a probe.

Moody’s Investors Service today withdrew its rating on Sino-Forest’s debt after cutting it to “Ca,” reflecting the high likelihood of default.

Company Sale

Greenheart, which owns forest assets in Suriname and New Zealand, sold about 34 percent of its products to Sino-Forest in the first nine months of this year, it said today. Sino-Forest also has a 39.6 percent stake in a Greenheart unit that owns forestry assets in western Suriname, it said.

Sino-Forest acquired a majority stake in Greenheart, which was previously Omnicorp Ltd., in August last year.

Sino-Forest said this week it’s considering putting itself up for sale. Chief Executive Officer Judson Martin, who also heads Greenheart, said in a Nov. 23 interview that the company may go private, seek a merger, or bring in a strategic investor.

Block, whose research firm Muddy Waters published the report on Sino-Forest, said in an e-mailed statement that “a bankruptcy filing is a real possibility” for the company. The company will work with stakeholders to determine the best course of action, Cindy Leggett-Flynn, Sino-Forest’s Hong Kong-based spokeswoman at Brunswick Group, said yesterday.

Sino-Forest formed an independent committee in June to investigate the accusations. The interim report released on Nov. 15 said it had confirmed the company’s cash balance and verified 77 percent of its timber assets.

The committee also said in its interim report that there were missing records. It reported difficulties in obtaining data, a lack of cooperation from some company executives, and an absence of an internal audit function.

It said this week that the final report will be delayed until 2012, instead of by the end of the year as previous stated.

To contact the reporter on this story: Michelle Yun in Hong Kong at myun11@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net

4:45

Aug. 29 (Bloomberg) -- Carson Block, research director and founder of Muddy Waters Research, talks about suspension of trading on Sino-Forest Corp. by Canada's main security regulator amid an investigation that the company has been inflating its China timberland holdings and the resignation of Chief Executive Officer Allen Chan. Block's firm issued a report in June stating that Sino-Forest overstated forestry holdings. Sino-Forest has denied the claims. Block speaks with Matt Miller on Bloomberg Television's "InsideTrack." (Source: Bloomberg)