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China Forestry Presses Ahead With Buyback as Prices Drop

China Forestry Holdings Co., the biggest loser among Chinese distressed debt in May, is pressing ahead with a bond buyback amid more missed coupon payments and a weakening cash position.

The timber company has until June 24 to re-purchase $180 million of its 10.25 percent notes due November 2015. The securities dropped 7.8 percent last month, the worst performance among 23 Chinese dollar-denominated bonds in Bank of America Merrill Lynch’s Emerging Distressed Debt Corporate Plus Index. Investors holding $100.56 million in face value have already accepted China Forestry’s offer of 42.5 cents on the dollar, a May 23 stock-exchange filing said.

“There could be a small amount of the bonds lost in some insurance companies in the middle of nowhere,” Charles Macgregor, head of Asia at Lucror Analytics Pte, an independent credit-research company, said in a May 29 interview from Singapore. “The remainder is probably in the hands of distressed investors. They’re probably holding out for a better deal.”

Global funds have become wary of some Chinese borrowers amid concerns their corporate governance and accounting standards aren’t up to scratch. Sino-Forest Corp., once China’s largest timber grower, filed for bankruptcy in March 2013 after Muddy Waters LLC said in 2011 it had overstated its timber holdings. China Forestry has weak liquidity and low visibility of a recovery, Standard & Poor’s said in a report last week.

Financing Difficulty

Beijing-based China Forestry declined to comment on its financing plans or on how it will fund the buyback, Agnes Suen, a spokeswoman in Hong Kong at Hill & Knowlton Inc., said in a May 29 e-mail.

“The company has been extending the offer’s expiry date,” S&P’s Hong Kong-based credit analyst Johnson Ng wrote in the May 28 note. “We believe China Forestry will seek external financing to fund that proposal, if it materializes. However the company may find it difficult to get external financing because it has missed its interest payment obligation twice and visibility of a business recovery is very low.”

The logger has received acceptance from bondholders for about 65 percent of the securities it doesn’t already own, short of the 80 percent it needs to amend some of the notes’ terms, according to company’s May 23 statement.

China Forestry first announced the buyback offer on Nov. 22, including a 7.5-cent incentive which expired in December, in an effort to cut its annual interest expense from an estimated $18.45 million. It has extended the buyback six times.

Sliding Bonds

The company sold $300 million of notes in November 2010, paying a 7.75 percent annual coupon which increased to 10.25 percent in August 2011. It bought back and canceled $120 million of the bonds in August 2011 and now owns about $25 million of the remainder, according to the statement.

A semi-annual coupon payment due May 17 is being delayed until June 16, the company said.

The securities fell to 31.125 cents on the dollar on May 31 from 35.875 cents at the beginning of the month, the Bank of America Merrill Lynch index shows. The measure itself rose 3.46 percent in May. The notes were quoted at 33.125 cents yesterday, according to Bloomberg-compiled indicative pricing.

China Forestry’s stock was suspended from Hong Kong trading in January 2011, having declined 19.4 percent since the end of 2010. The company delayed annual reports for 2011, 2012 and 2013. It appointed Crowe Horwath (HK) CPA Ltd. as auditors in January 2012 to replace KPMG LLP, which resigned after identifying accounting irregularities in 2010.

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