TORONTO, CANADA – March 30, 2012 - Sino-Forest Corporation ("Sino-Forest" or the "Company") (TSX:TRE) today announced that it has reached agreement with an ad hoc committee of its noteholders (the "Ad Hoc Committee") on the material terms of a transaction (the "Transaction") which would involve either a sale of the Company to a third party or a restructuring under which the noteholders would acquire substantially all of the assets of the Company, including the shares of all of its direct subsidiaries which own, directly or indirectly, all of the business operations of the Company.
The Ad Hoc Committee represents a significant portion of the holders of the Company's 5% Convertible Senior Notes due 2013, 10.25% Guaranteed Senior Notes due 2014, 4.25% Convertible Senior Notes due 2016 and 6.25% Guaranteed Senior Notes due 2017 (collectively, the "Notes" and holders of Notes, the "Noteholders").
The Company is initiating proceedings today in the Ontario Superior Court of Justice (the "Court") under the Companies' Creditors Arrangement Act (the "CCAA") seeking approval for a Court supervised restructuring process to implement the Transaction, including the immediate initiation of a sale solicitation process and a stay of certain creditor claims. Holders of approximately 40% of the aggregate principal amount of Notes have executed a support agreement (the "Support Agreement") in which they have agreed to support and vote for the Transaction. The Company will continue to solicit additional Noteholder support for the Transaction. Noteholders who wish to become "Consenting Noteholders" and participate in the Early Consent Consideration (as defined in the Support Agreement) are permitted to do so until May 15, 2012, and further information will be available on the website of the proposed monitor in the CCAA proceedings, FTI Consulting Canada, Inc. at http://cfcanada.fticonsulting.com/sfc.
Sino-Forest made the decision to initiate CCAA proceedings with the unanimous authorization of its Board of Directors after thorough consultation with its advisors and extensive consideration of other alternatives.
“We believe the full value of our assets will only be achieved if we are able to continue operating the business, and repair and preserve relationships with our customers and suppliers. We believe that the CCAA restructuring process is the best method to secure our future and will allow the time and stability required to normalize operations following the allegations made against the Company by Muddy Waters, LLC ("Muddy Waters").
The Transaction we have negotiated is indicative of the support of a significant portion of Sino-Forest's Noteholders," said Judson Martin, Vice-Chairman and Chief Executive Officer of Sino-Forest.
Sale Process The Support Agreement provides that the Company will make an application to the Court under the CCAA for an order approving a sale solicitation process pursuant to which Sino-Forest's financial advisor, Houlihan Lokey ("Houlihan") will solicit from third parties offers to purchase substantially all of Sino-Forest's assets (other than certain excluded assets).
Further details regarding the sale solicitation process will be announced by the Company following approval of a sale process order by the Court.
The Support Agreement provides that if the Company does not obtain an acceptable offer resulting from the sale solicitation process, the Company will implement a restructuring transaction (the "Restructuring Transaction") in which Sino-Forest will transfer substantially all of its assets, other than certain excluded assets, to a newly formed entity ("Newco") owned and controlled by the Noteholders in full and final settlement of all claims of any person in respect of the Notes. The assets transferred to Newco pursuant to the Restructuring Transaction would include all of the shares of the Company's directly owned subsidiaries and all of the receivables of the Company owed by its direct and indirect subsidiaries, but exclude certain litigation claims of the Company against third parties which will be transferred to a litigation trust (the "Litigation Trust") established to pursue such claims, including claims against Muddy Waters, and US$20 million in cash, which will be transferred to and used to fund the Litigation Trust.
If the Restructuring Transaction occurs, the Support Agreement provides that Junior Constituents (as defined in the Support Agreement) will receive: (a) their pro rata share of non-transferable "Contingent Value Rights" of Newco which will entitle them to receive 15% of the value of Newco, if any, in excess of U.S.$1.8 billion (being the approximate principal amount of the Notes) plus accrued interest on the Notes up to and including the CCAA filing date, for no additional consideration upon the occurrence of a liquidity event of Newco within seven years following the implementation date of the Restructuring Transaction, and (b) a right to receive their pro rata share of (i) 100% of any proceeds realized by the Litigation Trust for claims against or settlements with Muddy Waters and its joint actors, and (ii) the first $25 million of any proceeds realized from claims against or settlements with third parties other than Muddy Waters and its joint actors. If at the time proceeds are available for distribution from the Litigation Trust, the enterprise value of Newco is less than 85% of the principal amount of the Notes plus accrued interest on the Notes up to and including the CCAA filing date (the "Threshold Amount"), 30% of the remaining proceeds realized from claims against or settlements with third parties other than Muddy Waters and its joint actors will be paid to Noteholders (up to a maximum of the difference between the Threshold Amount and the enterprise value of Newco) and the remaining proceeds will be paid to Junior Constituents. If the enterprise value of Newco at the time such proceeds are available for distribution from the Litigation Trust is more than the Threshold Amount, Junior Constituents will receive 100% of the remaining proceeds realized from claims against or settlements with third parties other than Muddy Waters and its joint actors.
Many of the terms of the Restructuring Transaction remain to be settled between the parties in definitive documentation. The transactions contemplated by this press release will be subject to various conditions, including relevant creditor, regulatory and Court approvals. Sino-Forest continues to be subject to a cease trade order of the Ontario Securities Commission which prohibits trading in Sino-Forest's securities.
Additional details regarding the Transaction are contained in the Support Agreement, a copy of which will be available at www.sedar.com and on the proposed monitor's website at http://cfcanada.fticonsulting.com/sfc. There can be no assurance as to when or if a Transaction will be completed, or as to the terms of any such Transaction.
Claim Against Muddy Waters, Carson Block and Others
The Company also announced that it has commenced an action in the Court against Muddy Waters, Carson Block, and others, relating to the allegations made against the Company by Muddy Waters, and trading in Sino-Forest shares prior to and following the public release on June 2, 2011, of a report prepared by Muddy Waters. The action alleges that public statements made by Muddy Waters and Carson Block were defamatory. The action seeks damages in the amount of $4 billion and the recovery of profits made by Muddy Waters and others in connection with the Muddy Waters report.
Cash Balance, Cash Flow Projections and Third Quarter Financial Statements
As part of its negotiations with the Ad Hoc Committee, and pursuant to confidentiality agreements, the Company provided to certain Noteholders who were parties to such agreements, information regarding the Company's cash balance as of March 2, 2012 and its expected cash flow needs for the remainder of 2012. The confidentiality agreements require Sino-Forest to publicly disclose this information by the sooner of the commencement of any proceedings under the CCAA and April 30, 2012. The cash balance and cash flow projections provided to such Noteholders are attached to this news release as Schedule A.
The cash balance and cash flow projections are internal documents prepared by management of the Company and are subject to the assumptions set out in the projections. In addition, the cash balance and cash flow projections were prepared as at March 2, 2012, and may no longer reflect the Company's current circumstances or the current estimates of management of the Company. Neither the Board of Directors of Sino-Forest nor any of its committees has approved the cash balance or cash flow projections. Sino-Forest does not, as a matter of course, publish its budgets or make external projections or forecasts of its anticipated financial position, expenditures, cash balances or cash flows. The non-public information provided to the Ad Hoc Committee was not prepared with a view to being disclosed publicly and is included in this news release only because such information was made available to the Ad Hoc Committee.
Subject to applicable securities laws, Sino-Forest does not intend to or anticipate that it will, and disclaims any obligation to, furnish updated projections or forecasts or similar forward looking information to holders of securities issued by Sino-Forest or to include such information in documents required to be filed with the applicable Canadian securities regulatory authorities or otherwise make such information publicly available.
Sino-Forest will also file with the Court today in the CCAA proceedings, draft copies of its financial statements for the three and nine months ended September 30, 2011 (the "Draft Q3 Financial Statements"). The Draft Q3 Financial Statements will not be filed with the Canadian securities regulators, but will be available on the website of the proposed monitor at http://cfcanada.fticonsulting.com/sfc. Sino-Forest cautions readers that the Draft Q3 Financial Statements are in draft form only, and they do not and are not intended to comply with the requirements of applicable securities law or Canadian generally accepted accounting principles. As previously disclosed, the Company cautions readers that its historical financial statements, including the Draft Q3 Financial Statements, may not be reliable and should not be relied upon for any purpose. The Draft Q3 Financial Statements have been prepared by management of the Company and have not been reviewed or approved by the Board of Directors of the Company, any committee of the Board of Directors or the Company's auditors.
Sino-Forest has determined that it will not be in a position to file its audited annual financial statements for fiscal 2011 by the March 30, 2012 deadline. Sino-Forest has made considerable efforts to address issues identified by its Audit Committee and the Independent Committee and by its external auditor, Ernst & Young LLP, as requiring resolution in order for Sino-Forest to be in a position to obtain an audit opinion in relation to its 2011 annual financial statements. However, as yet, Sino-Forest has not been able to satisfactorily address those issues for audit purposes for the same reasons previously disclosed. Sino-Forest has also determined not to file its annual information form by the prescribed deadline and will apply to the Court for postponement of its annual meeting of shareholders for the duration of the CCAA proceedings.
Sino-Forest also announced that Albert Ip has resigned for health reasons from his position as Senior Vice President, Development & Operations North-East and South-West China. Mr. Ip has agreed to serve as a consultant to Sino-Forest on a part-time basis. "I would like to thank Albert for his service to Sino-Forest," said Judson Martin, Vice-Chairman and Chief Executive Officer of Sino-Forest.
Houlihan is acting as financial advisor to Sino-Forest, Bennett Jones LLP is acting as Canadian legal advisor to Sino-Forest and Osler Hoskin & Harcourt LLP is acting as Canadian legal advisor to the Board of Directors of Sino-Forest. The Ad Hoc Committee of Noteholders is being advised by Moelis & Company, Goodmans LLP and Hogan Lovells LLP.
About Sino-Forest Corporation
Sino-Forest Corporation is a leading commercial forest plantation operator in China. Its principal businesses include the ownership and management of tree plantations, the sale of standing timber and wood logs, and the complementary manufacturing of downstream engineered-wood products. Sino-Forest also holds a majority interest in Greenheart Group Limited (HKSE:00094), a Hong-Kong listed investment holding company with assets in Suriname (South America) and New Zealand and involved in sustainable harvesting, processing and sales of its logs and lumber to China and other markets around the world. Sino-Forest's common shares have been listed on the Toronto Stock Exchange under the symbol TRE since 1995. Learn more at www.sinoforest.com.
THE INFORMATION IN THIS DOCUMENT IS SUBJECT TO A NUMBER OF IMPORTANT QUALIFICATIONS
SET OUT IN THE NEWS RELEASE TO WHICH THIS DOCUMENT IS ATTACHED.
CASH BALANCE UPDATE & 2012 CASHFLOW FORECAST
THE INFORMATION IN THIS DOCUMENT IS SUBJECT TO A NUMBER OF IMPORTANT QUALIFICATIONS SET OUT IN THE NEWS RELEASE TO WHICH THIS DOCUMENT IS ATTACHED.
Summary Cashflow Since Publicly Disclosed on November 15, 2011
Total cash consumed between November 4, 2011 and March 2, 2012 of US$174.7 million
Cash consumed onshore was US$43.1 million while cash consumed offshore was US$131.6 million
Cash used in operations included purchases of land leases, a onetime offshore trading purchase, plantation overhead and corporate overhead, partially offset by collection of sales receipts
CASH BALANCE UPDATE & 2012 CASHFLOW FORECAST
Cash Position by Geography as of March 2, 2012
Cash Position Summary as of March 2, 2012 (US$mm)(1)
China Entities – Accounts in China 211.0(2)
China Entities – Offshore Accounts 43.2
Hong Kong 74.2
A substantial portion of the Company’s cash balance is currently held in its People's Republic of China (PRC) subsidiaries in United States dollars (USD). Conversion of USD to Renminbi (RMB) requires approval of the State Administration of Foreign Exchange (SAFE) in China.
(1) Assume RMB/USD conversion rate of 6.3
(2) Subject to SAFE procedures relating to conversion of foreign exchange into USD for
repatriation outside of China and certain funds are pledged as collateral for PRC bank loans
2012 Cashflow Forecast Assumptions
The following outlines major assumptions that drive the 2012 cashflow forecast
CCAA filing end of the first quarter of 2012
No cash interest will be paid on the Notes during CCAA
Emergence from CCAA end of the third quarter of 2012 with no debt
remaining in Canada (will be dealt with under CCAA plan)
Assumes US$4 million transfer from Hong Kong to Canada in the first quarter
of 2012 to top up funds required for litigation trust, etc.
Professional fees continue at current rate (approximately US$4 million / month) until filing CCAA then step up to US$5 million per month until emergence end of the third quarter of 2012
Assume US$35 million of one time emergence costs in the third quarter of 2012
for transaction fees, any potential financing fees, cash remaining to fund litigation
trust (assumes US$20 million left in SFC to fund litigation), etc.
Business activity level
Business operates in “maintenance mode” in the first quarter through the third
quarter of 2012 (e.g., some opportunistic WFOE timber sales, BVI timber
purchasing continues but selling slows down such that existing A/R balances are
reduced, normal SG&A, offshore trade executed, manufacturing/other businesses
operate normally, etc.)
Restart normal WFOE timber business operations at the beginning of the fourth
quarter of 2012, with approximately 7,700 WFOE hectares sold
Company currently exploring opportunity to monetize selected WFOE assets
for cash in the first and second quarters of 2012, but existing 2012 forecast
does not assume restart until the fourth quarter of 2012
No onshoring of BVI timber assets
Working capital “true up” begins in the fourth quarter of 2012.
Legacy issues are resolved over two year time period, which results in net neutral cash flow (~100% of payables are paid and ~80% of receivables are collected), though payables are already being settled, whereas collection of receivables does not start until the fourth quarter of 2012.
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