Sino-Forest might have come down like one of its (absolutely plenteous) Yunnan broadleaf trees on Muddy Waters LLC…
And there’s a lot to leaf through (both pro and con) in the documents it’s released to investors… more on them in a bit.
But doubts about the company keep piling up, especially regarding Sino-Forest’s cash and debt position.
Some of the most impressive claims that FT Alphaville has seen in this area came from Nomura Asia credit analyst, Annisa Lee, on Tuesday. Lee began by looking at the company’s cash position as a basis for the recovery values of its around $1.9bn in offshore bonds, which Moody’s incidentally placed on review for downgrade on the same day. (Sino-Forest’s 2017 bonds currently trade around 70 cents in the dollar, and its 2011 bonds 82 cents in the dollar.)
The ratings agency said that whatever else its review may uncover, Sino-Forest at least had $1.09bn of liquidity in immediate cash on balance sheet at the end of March – ‘This compares well with the short term liabilities as of end 2010 of US$0.76 billion.’
Nomura’s take on that $1.09bn is rather different. For a start, it admits the sheer difficulty of estimating Sino-Forest’s actual cash, and assumes that the $3.1bn valuation of the company’s forestry holdings needs to be written down by 80 per cent (more on these valuation doubts in a bit). This point is in the optimistic case on recoveries — and which goes on:
We estimate its accessible cash balance to be about US$693 million. This is based on the following assumptions. Cash balance as of March 2011 was US$1.09 billion, of which US$322 million was in PRC and US$767 million was in HK including US$70 million at the Greenheart level. Cash balance at Sino-Forest was about US$697 million excluding those at Greenheart level. Cash burn in 1Q11 was about US$165 million. Assuming this to be the same for 2Q11 and investors can have access to 100% and 50% of its cash balance in HK (at the company level) and PRC respectively, we estimate the current available cash at Sino-Forest company level is about US$693 million.
…
Recovery rate of the bonds will be 58 cents to the dollar assuming that the onshore bank loans will have the priority to get repaid first.
The pessimistic case dials down the valuation by another 10 per cent and halves the cash accessible to investors, leaving 23 cents behind for the bonds. And again, that’s including the fact of this structural subordination of offshore to onshore creditors which Nomura points to. (It’s an ongoing issue for anyone investing in dollar-denominated Chinese offshore debt, in fact.)
It’s at this point that Nomura get stuck into the underlying issue here, Muddy Waters’ claims about the valuation — and business model — of Sino-Forest’s plantations. We’ll save those points for later however on going through the supporting documents which Sino-Forest has now supplied. [Update -- the post is here.]
Needless to say though, there’s already plenty here to disturb its bondholders. Here’s one last Nomura point about the company’s convertible bonds:
The company does not have conservative financial accounting. For example, US$158.9 million out of total CB outstanding of US$805 million was being treated as equity which means total debt outstanding was understated. This includes US$91.1 million out of its US$460 million 2016 CB, US$70.4 million out of its US$345 million 2013 CB and US$0.94 million out of Greenheart’s US$25 million 2015 CB being treated as equity. The bond issuance costs were prorated against the liability and equity components.
When a forest falls on muddy waters, it makes a big splash…
(Hmm. Almost a proverb.)
Related links:
Sino-Forest fights back, stakes get higher - FT Tilt
Sino-Forest — a defence – FT Alphaville