Moody's Puts Sino-Forest Ba2 Rating On Downgrade Review, Does Not Cite Its Own Due Diligence Incompetence As A Factor

Tyler Durden's picture

Moody's joins every other sellsides who forgot to actually perform any due diligence on the company Buy rating notwithstanding, and has just put the company's Ba2 rating on downgrade review. This is more bad news for Paulson who is rumored to have not only a big position in the company's stock, but substantially exposed to its debt as well. Moody's cites: "allegations surrounding the accuracy of Sino-Forest's audited accounts and its business model" as the reason for the downgrade. Great job Moody's: feel free to piggyback on the work of 2 guys in a small office somewhere who did your job for you. Now when is Mark Zandi taking over Goolsbee's job?

From Moody's

Moody's Investors Service has put Sino-Forest Corporation's ("Sino-Forest") Ba2 corporate family and senior unsecured ratings on review for possible downgrade.

This review action follows allegations surrounding the accuracy of Sino-Forest's audited accounts and its business model.

As a result, prices for the company's shares and bonds have declined substantially in value.

"While Sino-Forest has refuted the bulk of the allegations and has set up an independent committee to investigate them, Moody's is concerned that its financial position and business plan will be negatively affected in the interim, and even if they prove to be unfounded. In addition, they are serious and, as such, require careful consideration," says Ken Chan, a Moody's Vice President and Senior Analyst.

In its review, Moody's will seek to assess the veracity of the claims with a particular focus on the following:

1) The conversion of reported sales to cash flow; Moody's notes a material increase in working capital during 2010 and which was -- at year-end -- greater than the increase in sales. First quarter 2011 results will be released on 14 June and should provide insight into the progress of converting working capital to cash;

2) Ownership and valuation of its timber plantation assets; The company has responded to allegations in this context, and has promised further information in coming weeks;

3) Relationships with the authorized institutions which buy timber from the company, and which are the primary source of outstanding receivables;

4) Compliance of the company's business model with regulations in China, particularly around the sales arrangement for standing timber and logs;

5) The potential for the company's business model to be impacted in the next 2-3 years, even if the allegations prove to be unfounded. In this context, Moody's notes that Sino-Forest has been growing aggressively, and needs ongoing access to the equity and debt markets to continue such growth. There is a risk that the current allegations will damage its ability to do so, or increase the cost of doing so.

Moody's notes Sino-Forest's immediate liquidity position appears robust.

Based on the company's announcement of June 6, it had US$1.09 billion of cash on its balance sheet as of March 31, 2011, and it also confirmed that there had been no material change in that position since that date.

This compares well with the short term liabilities as of end 2010 of US$0.76 billion.

Please see ratings tab on the issuer/entity page on for the last Credit Rating Action and the rating history.

Sino-Forest's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Sino-Forest's core industry and believes Sino-Forest's ratings are comparable to those of other issuers with similar credit risk.

Sino-Forest Corporation is a holding company listed in Toronto. The company is engaged in forestry plantation activities in China, as well as in the sale of timber, wood logs and other wood products in China.

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oogs66's picture

What does Moody's do?  They missed all of this too?  As debt holder its even more important to them!  Maybe Warren will buy Sino to make them look better.

Ahmeexnal's picture

And the SEC has suspended trading in several companies, including Leo's beloved solars:

whydtinogo's picture

I await a conflicting upgrade from Dagong

rfullem's picture

same could be said for mortgages (AAA?), greek debt (wasn't is A-?), AIG, GE. These agencies are outright dangerous - even more so than government agencies.

oogs66's picture

though in the end, it is regulators and lazy investors that give the rating agencies any power

AUD's picture

These tree growing scams always go bust. We've had several here in Australia in the last few years.

economessed's picture

Rating agencies are the toupee salesmen of the hair styling world.

GeneMarchbanks's picture

once again, things that should have been brought to my attention yesterday!!!

oogs66's picture

Moody's deserves more credit than that.  Their ratings are so stable that Sino-Forest has been rated Ba2 since July 2004.  The rating was so well thought out that it didn't adjust through any of the commodity run ups, market crashes, or anything.  S&P actually upgraded it once in 7 years. 

slewie the pi-rat's picture

hahaha!   "...feel free to piggyback on the work of 2 guys in a small office somewhere who did your job for you." 

at least the room had a view...of reality!

A Man without Qualities's picture

Am I the only one who wonders if Carson Block might not be working for the US government?  Just looking at the facts, it would make a lot of sense....

oddjob's picture

Only snivelling spineless unskilled chair moisteners work for the government.

Ergo's picture

I can imagine people looking at a commodity business with vast real estate assets in China, and thinking it makes sense to invest.  Interesting how some research questions on cash flow seem to have busted the assumptions. 

Anecdote:  There's a lot of timberland in East Texas.  It takes decades to grow something harvestable.  You buy with the ideas that (1) someday your kids may cut the trees and remember you fondly, maybe, (2) meanwhile you have a place to go hunting (although not the best in the state), and (3) it parks money you don't need somewhere it can't get lost.  And of course, land value varies wildly, and minerals are their own story.

That's just common knowledge around here.  My parents have a little timberland.  It's chief value is that it's fun to drive golf carts through the trails with our children.  Last weekend, we saw a deer, a turtle, and a beaver (which isn't so good for the trees).

aminorex's picture

There was nothing for Moody's to miss. This is all just  Carson Block running an extortion scam.  TSX:TRE is now trading for less than it's cash in the bank in  Hong Kong.  It's easy to do this to Chinese companies because they are far away and foreign, but also because there's no one to buy them up when they trade below their assets.  Weyerhauser isn't going to acquire 176,000 acres of prime old-growth in Yunnan, and the CCP wouldn't let them if they tried.  There is no M&A market, and the shares are mostly in weak hands.  The weak get ripped off all day every day, so no surprises there.  I suspect Paulson will be serving Block his vital organs on a platter, however.  Those are not weak hands.