‘Significant Impediment’ to Sino-Forest Asset Split

The close relationship between the Chinese Government and the country’s largest private forestry company will be a “significant impediment” to efforts to split up assets to pay off about $2 billion in debt.

Sino-Forest Corporation, which has forestry interests in New Zealand through an offshoot company, has achieved a temporary protection from the holders of more than C$1.8 billion in corporate debt.

Sino-Forest’s offshoot Greenheart is the owner of the Mangakahia Forest in New Zealand, so questions are being raised over whether this, and another forest asset in Surname, will also be up for sale.

However, a spokesman for the Hong Kong-based law firm tasked with managing the asset sales, Dan O'Donnell of Houlihan Lokey, told me: “Sino-Forest does not currently own New Zealand timber assets. The NZ timber assets that may be mentioned in the press relate to Greenheart.”

Also adding to the complication is the involvement of Richard Chandler Corporation, which is Sino-Forest’s largest single shareholder. Richard Chandler, New Zealand’s second richest man, is based in Singapore and issued a statement outlining its own plans for Sino-Forest.

Richard Chandler has appointed David Walker, who it described as “a recognised expert in the Asian forestry and forest products industry, to lead its proposals for restructuring of Sino-Forest.

But selling the company’s extensive forestry assets is likely to prove problematic as a result of Sino-Forest’s close relationship with government agencies and officials within the government of the People’s Republic of China, says a report to the Superior Court of Justice in Toronto by FTI Consulting Canada Inc., appointed as monitor for the proceedings.

After outlining the company and its current situation, along with restructuring proposals and a likely sales process, FTI highlighted the complexity caused by Sino-Forest’s relationship with the Chinese Government.

“Based on conversations that [FTI] has had with members of senior management of the company and various of its advisors, [FTI] understands the PRC government has and will continue to play a key role in any successful restructuring.”

FTI goes on to outline the complicated ownership structure required for private forestry operations in China, including the Forestry Law which provides a limited ability for forest ownership.

“[FTI] has also been advised that it is not clear that the Forestry Law has been fully implemented on a nation-wide basis such that, in some instances, no verification from regional forestry bureaus may be available.”

Sino-Forest had advised the PRC had taken numerous steps in the last years to promote the timber plantation industry, including opportunities for foreign investment.

FTI added it was also apparent that navigating timber operations with the PRC had obvious political and state related implications due to the following:

• The role of the Chinese government in business generally,
• the geographic location of many of the plantations,
• the reliance upon provincial and other registries for asset verification, and
• the uncertainty surrounding certain taxation and other laws in the PRC that could have significant implications on Sino-Forest’s business structure and/or ability to expand.”

The emphasis was further underlined, FTI said, by an emphasis put on “business relationship” among parties being “paramount” to any contractual or legal relationships.

“The relationships are relied upon for the conduct of business in this [forestry] industry in the PRC. In the course of its investigation [the independent directors’ committee] reported that it was apparent that integral to Sino-Forest’s business model was its relationships with business partners.”

Noting the relationship between Sino-Forest and the government stretched over 18 years, FTI said “All these factors have resulted in Sino-Forest having a positive and encouraging relationship with the PRC government.

“Consequently, the PRC government has, by and large, been facilitative of Sino-Forest’s business. Ongoing support will be required if this restructuring process is to be successful.”

Much of Sino-Forest’s historical success had been due to the leadership of Allen Chan, who resigned last year when allegations of misreporting first emerged in a report by Muddy Waters reporting services.

Although Chan had resigned, FTI said he remained involved in Sino-Forest and played a key role in maintaining and building on existing PRC relations.

“It is equally clear to [FTI] that the PRC government has the ability to be a significant impediment to solutions that it does not view as favourable or in furtherance of PRC policy.”

Sino-Forest and Houlihan, the Hong Kong law firm soliciting sales on behalf of noteholders, had both expressed the view that “if attempts were made to break up the company, that could be viewed as being contrary to the general direction of, and have a significant impact on, the PRCs natural resource growth policies and would likely be viewed negatively by the PRC government.”

The government was “cognizant” of the location of many Sino-Forest plantations in proximity to state-run facilities and expressed concern about how this would impact operations should the plantations change hands.

ENDS

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