12/19/2011 10:06 EST | Updated 02/18/2012 05:12 EST

Sino-Forest Default Notices: Troubled Forestry Company Seeks Way Out

Sino Forest

TORONTO - Troubled forestry firm Sino-Forest Corp. (TSX:TRE) says it has received default notices from its bondholders and has set up a committee to explore its options, which could include a sale of the company.

The TSX-traded Chinese timberland company, which has been accused of fraudulently exaggerating its sales and assets, said late Sunday that the notices of default were received on senior notes due 2014 and 2017.

Sino-Forest said it has established a special restructuring committee made solely of independent directors to supervise, analyse and manage a review of the options for the company.

"Those options may include the recapitalization of the company, the sale of some or all of its business or assets, as well as creditor-protection or other insolvency-related proceedings," the company said.

The members of the committee include chairman William Ardell and Garry West.

Sino-Forest has about US$1.8 billion in four series of outstanding senior and convertible notes as well as loans in China totalling about $70.5 million.

The announcement came several days after Sino-Forest said it would not make a US$9.8-million interest payment due last week and that it will miss deadlines to release both its third-quarter results and a report on the fraud allegations.

After that revelation, Moody's said it would withdraw its ratings after downgrading the company to Ca from Caa1, a rating that suggests a high likelihood of default and a low level of expected recovery for bond holders.

The two biggest shareholders in Sino-Forest also blasted the company — one called for a new management team and the other said it was "shocked" by the tree plantation operator's decision not to pay its bond debts.

Sino-Forest also said it met with an ad hoc committee of note holders and their lawyers last week.

"The note holders and their legal counsel expressed a willingness to work co-operatively with the company in an effort to preserve value for the benefit of the company's stakeholders," it said in a release.

Sino-Forest was accused in June by short-seller Muddy Waters Research of overstating the value of its assets and revenue.

A short-seller profits when the price of a stock falls, which happened in Sino-Forest's case after the Muddy Waters report. The allegations prompted the Ontario Securities Commission to launch its own investigation and later to refer the case to the RCMP for a criminal investigation.

Last month, Sino-Forest said an interim report from an independent committee disproved allegations the Chinese company is a fraud, but also raised issues about the challenges of verifying its timberland holdings amid the country's legal regime.

Muddy Waters research director Carson Block has questioned the credibility of the independent committee's report.

Sino-Forest has raised about $3 billion from the sale of shares and corporate debt issues since 2003 — bought by Canadian, American and international investors.

Its stock, which traded for more than $14 before the allegations were first made, had fallen to as low as $1.29, but recovered to trade for $4.81 before the OSC halted trading.

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