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?
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 Moodys.com 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.