Sino-Forest Corp. filed for bankruptcy protection as part of a plan that may see the Chinese timber grower company sold to bondholders, nine months after it was accused of fraud by short seller Carson Block.
The company obtained an initial order for creditor protection in the Ontario Superior Court under the Companies’ Creditors Arrangement Act, Sino-Forest said yesterday in a statement. The company said in an earlier statement it reached an agreement with bondholders to seek a sale to a third party or a restructuring under which they would acquire substantially all of its assets.
Investors in Sino-Forest, once the largest Chinese forestry company by market value, lost about C$3.3 billion ($3.3 billion) since Block’s research firm Muddy Waters LLC published a report June 2 accusing it of overstating earnings. The shares plunged 74 percent before being suspended Aug. 26 amid investigations by Canadian regulators and police. Allen Chan, the company’s co-founder, stepped down as chief executive officer in August.
“This is yet another indication of what we have said all along, that Sino-Forest’s management has committed a massive fraud and has deceived its shareholders and creditors,” Block said yesterday in an e-mailed statement. “If the company were really generating close to $2 billion in operating cash flow, it would not have had to file for a court supervised restructuring.”
Houlihan Lokey, Sino-Forest’s financial adviser, has started soliciting interest from “prospective strategic or financial parties,” Sino-Forest said.
The Hong Kong- and Mississauga, Ontario-based timber company also said it started a court action against Muddy Waters, Block and others relating to the allegations, which it says were defamatory. Sino-Forest said it’s seeking damages and the recovery of profits made by Muddy Waters and others made in connection with the report. The suit was filed in the Ontario Superior Court.
Block said in an e-mail that the lawsuit is “entirely without merit” and that he stands behind the Muddy Waters report.
Sino-Forest missed an interest payment on its 2016 convertible bonds in December. It reached a waiver agreement in January with a group of bondholders, in return ceding them a degree of control, including a say on certain transactions, the appointment of directors and senior executives, and access to offices.
An independent committee of Sino-Forest directors spent more than $50 million on an eight-month investigation. The committee published a report in January in which it said Sino-Forest may not be able to disprove some allegations as the information may not exist or be retrievable.
“Where we have a company where that level of clarity isn’t available, there are serious issues,” Kevin Pollack, a fund manager at Paragon Capital LP in New York, which invests in U.S.-listed Chinese stocks, said in a telephone interview. Pollack said he’s never been a Sino-Forest investor.
Sino-Forest’s 6.25 percent notes due in October 2017 fell to 32 cents on March 21, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
The court order will formally be issued April 2, Ontario Superior Court Judge Geoffrey Morawetz said yesterday. Rob Staley of Bennett Jones LLP in Toronto, the lead counsel for Sino-Forest, asked Morawetz to consider April 13 as the next day in court for the proceedings.
‘Company in Distress’
“This is a company in distress, it’s in urgent need of restructuring,” Staley said in court yesterday. “The company hasn’t been able to extricate itself from the allegations by Muddy Waters.”
The company said it wouldn’t be able to file its fiscal 2011 financial statements by yesterday’s deadline. Albert Ip resigned as Sino-Forest’s senior vice president, development and operations north-east and south-west China, because of health reasons, the company also said.
Ip, who will continue to serve Sino-Forest as a consultant, was one of five executives at the company ordered by Ontario Securities Commission to resign on Aug. 26, a move the regulator rescinded later the same day.
“We believe the full value of our assets will only be achieved if we are able to continue operating the business, and repair and preserve relationships with our customers and suppliers,” Sino-Forest Chief Executive Officer Judson Martin said in the first of the company’s statements issued yesterday.
The Toronto Stock Exchange said yesterday it’s reviewing the listing of Sino-Forest’s shares.
Bennett Jones is Sino-Forest’s Canadian legal adviser. Osler Hoskin & Harcourt LLP is Canadian legal adviser to its board. Moelis & Co., Goodmans LLP and Hogan Lovells LLP are advising the group of bondholders.
The cases are: In the Matter of a Plan of Compromise or Arrangement of Sino-Forest Corp., CV-12-9667-OOCL, and Sino-Forest Corp. v. Muddy Water LLC, CV-12-9666-OOCL, Ontario Superior Court of Justice (Toronto).