Sino-Forest bonds end mixed, Paulson defends investment; NewPage weakens as coupon draws near

By Stephanie N. Rotondo and Paul Deckelman

Portland, Ore., June 24 - Market skittishness - due mostly to concerns about Europe, particularly Greece and Italy - resulted in a lackluster Friday session, distressed debt traders reported.

"There's just not a lot of trading today," a trader said.

But investors were paying attention to Sino-Forest Corp. again, as Paulson & Co. founder John Paulson attempted to explain his investment rationale. Paulson was - up until late last week - Sino-Forest's largest shareholder, until the fund began divesting its holdings.

The bonds closed mixed on the day.

Meanwhile, NewPage Corp.'s debt continued to lose ground. A coupon on the company's first-lien bonds is coming due next week and the market is wondering if the payment will be made. Based on the amount of recent losses in the notes, many are expecting the payment to be skipped.

Sino-Forest ends mixed

Sino-Forest's 6¼% notes due 2017 headed into higher territory Friday, as hedge fund giant John Paulson defended his decision to invest in the Chinese-Canadian-based timber products company.

One trader said the paper was "a good bit better," trading around 50. He called that up 6 to 7 points.

Another trader said the issue popped up over 3 points to around 48. The 10¼% notes due 2014, however, were deemed a point weaker around 51.

"Weird," he said. "Don't know what to make of that."

Another trader said that the 9 1/8% notes slated to come due on Aug. 17 were going out around 85 bid, which he called a 5-point rise on the day, with the 10¼% notes at 50 bid, 52 offered, which he said was also up 5 points, as were the 6¼% notes at 48 bid, 50 offered.

"They were all up 5 points," he declared.

Even with Friday's Paulson pop, though, he said the whole Sino-Forest debacle is "ugly."

"Fraud is not a good thing."

In a letter to investors, Paulson said that losses tied to Sino-Forest hit about $574 million so far this year. Earlier in the week, the fund reported that it was divesting its stake in the company.

Although the losses were hefty, Paulson claimed that the decision to invest in Sino-Forest was made only after "considerable due diligence." The recent decision to unload the stake was due to the belief that the stock will "remain depressed for an extended period of time, even if the investigation clears management."

Sino-Forest began tanking earlier in the month, following the release of a report by Muddy Waters Research, a Hong Kong-based company founded by known short-seller, Carson Block. In the report, Muddy waters alleged that Sino-Forest had overstated its land holdings and also pointed to other wonky accounting issues that eventually led the firm to cry fraud. Though Sino-Forest has vehemently denied any wrongdoing, the stock has tumbled significantly and the bonds have gyrated all over the map.

NewPage sweating coupon

NewPage's bonds weakened further during the session, as the coupon payment on the 11 3/8% first-lien notes due 2014 loomed large.

A trader said the 11 3/8% notes fell "just below 90," which was down "another half to three-quarters."

He also saw the 10% notes due 2012 at 26 bid, 27 offered.

"NewPage, as usual, trades all the time," said another trader. He called the 11 3/8% notes a point lower at 89½ and the 10% notes just a quarter-point softer at 263/4.

Another trader said that NewPage "continues to be active," seeing the 11 3/8% notes down a point, trading between 89 and 90 versus 901/2-91½ the previous session.

He said that "way back in February, I thought that the 11 3/8s could get through this whole process unscathed - but I'm not so sure now. They may be able to - but I'm not sure."

He also saw the 10% notes down around 26, and the "really junior ones" - the 12% notes due 2013 - in the single digits.

He speculated that in the event of a default and subsequent restructuring - in or out of court - the holders of the latter bonds "might get some warrants, or something." He saw holders of the 10% paper getting "most of the equity," while the holders of the most senior issue "will just get reinstated, as they are, if things work out really well, and if not, they'll get some kind of new debt instrument."

On June 30, an about $100 million coupon payment will come due and the market had pondered whether the beleaguered papermaker will be able to make the interest payment. The Miamisburg, Ohio-based company is also faced with the task of repaying or refinancing its 10% notes before the end of the year, or else deal with the acceleration of other debt.

Meanwhile, a trader said that NewPage sector peer Catalyst Paper Corp.'s bonds were down by several points, seeing its 7 3/8% notes due 2014 at 59 bid, 62 offered, while the 11% senior secured notes due 2016 were at 85 bid, 87 offered, also down by several points.

"A lot of things were heavy today," he said.

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