Distressed market focused on Sino-Forest drama, bonds drop as much as 50 points; Edison slips

By Stephanie N. Rotondo

Portland, Ore., June 3 - The distressed debt market homed in on Sino-Forest Corp. during Friday's session, leaving room for little else to go on, according to traders.

"Other than Sino-Forest, it was a pretty tame day," one trader remarked.

The activity came on the back of a research report put out Thursday that claimed the company's accounting was wonky and allegations of fraud were thrown about. The company vehemently denied any misrepresentations in its books on Friday, but also said that it was forming a committee to investigate the claims.

Away from Sino-Forest, the market "drifted lower early and then came back up," a trader said. More weakness in the equity markets, as well as a disappointing jobs report did little to entice investors.

Edison Mission Energy's debt declined a bit, though in thin trading. The fall came as the group's parent company said it was looking to up the value of its subsidiary.

Sino-Forest bonds whacked

Sino-Forest was deemed the "bond du jour" as the company's bonds dropped 30 to 50 points on allegations of fraud.

"Some bonds did trade as low as the high-40s," a trader said. The bonds had been quoted lower during the previous session, but little trading actually occurred. "There was a lot more trading today."

The trader said that the notes "were lower earlier" - performing in line with the general market, which was down early on but recovered a bit by day's end.

"The game is just beginning in that one," the trader said, noting that the stock also got crushed.

The equity (Toronto: TRE) declined $9.09, or 62.86%, to $5.37. The shares had lost about $5 in the previous session as well - the stock was at $18.21 at the close June 1.

Another trader said the 10¼% notes due 2014 dropped over 50 points to trade as low as 51 before settling back into the mid-60s.

"I think they bounced back a little bit but that was definitely the ugly one," he said.

A third trader then called the 6¼% notes due 2017 down over 30 points at 61.

"It's worth sparing a thought for investors in Sino-Forest, the Chinese corporate that has dropped 40 points today now," a London-based trader said. "This makes Belarus look positively stable."

Short-seller alleges fraud

On Thursday, a research report put out by a Hong Kong-based outfit called Muddy Waters Research, declared that the amount of land Sino-Forest reported buying from Lincang City in the Chinese province of Yunnan doesn't match city records - meaning that the company could not have produced as much timber in the area as it claimed.

Muddy Waters put out a "strong sell" recommendation on the stocks, saying the equity was worth no more than $1 and also charged that "like Madoff, TRE is one of the rare frauds that is committed by an established institution. In TRE's case, its early start as an RTO fraud, luck, and deft navigation enabled it to grow into an institution whose 'quality management' consistently delivered on earnings growth."

"TRE, which was probably conceived as another short-lived Canadian-listed resources pump and dump, was aggressively committing fraud since its RTO in 1995," the report said.

The damning research report further charged that "TRE relies on Jakko Poyry to produce reports that give it legitimacy. TRE provides fraudulent data to Poyry, which produces reports that do nothing to ensure that TRE is legitimate."

Finally, "TRE's capital raising is a multi-billion dollar Ponzi scheme, and accompanied by substantial theft," the Muddy Waters report concluded.

Come Friday, the Toronto and Hong Kong-based company responded to the allegations, pointing out that Muddy Waters was founded by a prominent short-seller who would be in a position to make substantial money from a decline in the company's shares.

Company responds

"Muddy Waters has a short position in the company's shares and therefore stands to realize significant gains from a share price decline that it precipitated," the company said in a statement. "Muddy Waters expressly admits that it makes no representation as to the accuracy, timeliness, or completeness of any information contained in its report."

"Further, its website discloses no address or ownership information, nor the credentials of any of the authors of the 'report.' Neither the Ontario Securities Commission nor the Securities Exchange Commission website lists Muddy Waters or its author as being registered as an advisor."

Still, despite the murky validity of the report and its allegations, Sino-Forest said it would assemble an independent committee to look into the matter.

"It is important that our independent committee thoroughly address Muddy Waters' allegations, and they will have my full support and those of the management team in doing so," said Allen Chan, chairman and chief executive officer, in the statement.

"However, let me say clearly that the allegations contained in this report are inaccurate and unfounded. Muddy Waters' shock-jock approach is transparently self-interested and we look forward to providing our investors and other stakeholders with additional information to rebut these allegations."

Edison Mission notes weaken

Edison Mission Energy's 7% notes due 2017 drifted down about a point, a trader said, following a presentation made by parent company Edison International Inc.'s CEO.

The trader placed the notes around 811/4.

"They had been kind of drifting down," he said. "They pushed up to 83-84 midweek and now they are right back down."

Another trader noted that there was "not a lot of trading going on there," but also called the debt weaker at 81 bid, 81½ offered.

However, he said the notes lost only a quarter to half a point on the day.

Theodore Craver Jr., CEO of Rosemead, Calif.-based Edison International, told the audience at the Sanford Bernstein & Co. Strategic Decisions Conference in New York that the Edison Mission Group subsidiary was focused on looming maturities. The group has $500 million of debt maturing in 2013, another $500 million maturing in 2016 and $1.2 billion due in 2017.

Additionally, the group is working to meet environmental requirements.

While all that is in the works, the parent company, for its part, is trying to increase the value of the subsidiary.

"The key is we need to really execute the plan that we have, we need to maintain our financial discipline and, very importantly, we need to keep coming up with innovative solutions on how we overcome some of the challenges we have in our business," Craver said.

Also in the power-producing realm, Dynegy Inc.'s 7¾% notes due 2019 were deemed "active" but "almost unchanged" at 72 3/8.

OPTI Canada Inc.'s 7 7/8% notes due 2014 meantime fell a point to 461/2.

Clear Channel falls

A trader said Clear Channel Communications Inc.'s 6 7/8% notes due 2018 dropped 1½ points to end at 691/2.

He said trading was "kind of active" in the name, though there was no news out to cause the movement.

Clear Channel is a San Antonio-based multimedia company.

Paul Deckelman and Christine Van Dusen contributed to this article

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