Sino-Forest gyrates following fraud allegations; BPZ drops on resignation; solar names eyed

By Rebecca Melvin

New York, June 6 - Sino-Forest Corp.'s convertibles gyrated Monday as shares of the China-based, Toronto-listed commercial tree plantation operator bounced higher following a press release again refuting allegations by Muddy Waters Research that its acreage assets are exaggerated.

Sino Forest's convertibles started the session following shares higher, then traded flat, but ended down, a New York-based sellside analyst said.

"They were all over the place," he said.

BPZ Resources Inc. convertibles traded lower outright on Monday in tandem with shares after the Houston-based oil and gas company's chief financial officer resigned. BPZ's 6.5% convertibles due 2015 dropped to the 93.5 bid, 94 offered from the area of 99 to 99.75.

A few solar names traded, including JA Solar Holdings Co. Ltd.'s 3.5% convertibles of 2013, which has typically been an outright name and traded up two or three points.

Germany, which has made headlines in recent days because of its intention to exit the nuclear power industry in little more than a decade, on Monday let it be known that it would not cut subsidies to solar panel owners as planned.

Overall, the convertible market was described as quiet and typical for a Monday, with credit markets generally flat to down by 0.25 point.

Generally, the market heats up for the middle of the week, but with little economic data or other items expected to precipitate trade, players were braced for a quiet week.

"There will be little data or news points that you can process new information from, so it's likely to be a slow leak from here until things get better," a New York-based sellisde trader said.

Moreover, trading constraints have developed within the convertibles market that are creating an unhealthy trend of encouraging players to do their deals off line.

"It used to be people would go out with markets and everyone would see, but now you have to really dig and all of a sudden you hear that this big trade or that got off," a New York-based sellside trader said.

Macro picture

New issuance would go a long way to relieving the trading constraints, but conditions in the broader markets continue to pull away from the prospect of higher rates anytime soon. Higher rates would encourage issuers to use the convertible market rather than the high-yield market, which has been in favor because rates are low.

On the other hand, new issuers could come in even if rates don't rise in the near term.

"If it looks like we really see stocks roll over, we might get some issuance based on that, or before credit widens, which has happened in certain sectors, like financials, already," a trader said.

Sino-Forest moves around

Sino-Forest's 4.25% convertibles due 2016 started the day up, then traded flat and then moved down, a sellside analyst said. On Friday, the paper was marked at 54 bid at the end of the session, and earlier in the week, it had been at 116.

Sino-Forest shares, listed on the Toronto Stock Exchange, ended Monday's session up C$0.87, or 17%, at C$6.10 apiece.

The company put out a press release on Friday refuting Muddy Waters allegations of fraud, and followed up with a second release on Monday.

The company said again on Monday that it believes Muddy Waters' report to be "inaccurate, spurious and defamatory."

"Muddy Waters' self-interest is transparent: to make money from the fall in Sino-Forest's share price on the back of a decline that itself precipitated," the company said.

"Since the report's release, the company has been working to address the allegations [...] and it is the board's fiduciary duty to address these allegations with an unrestricted thorough and independent review, through the independent committee that was set up late last week," the release stated.

The committee has appointed independent legal counsel Osler, Hoskin & Harcourt LLP to support it in Canada and both Mallesons, a leading international law firm with offices in Beijing, Shanghai and Hong Kong, and Jun He Law Offices, a leading Chinese law firm.

The recent events have caused several shareholders to request clear proof of ownership of the company's timber assets.

The board is anxious to respond to this request and has commenced actions to address this, focusing first on Yunnan Province, where the company's largest hectarage of purchased plantations are held and where the short-seller focused its attacks," the company said.

Muddy Waters Research, based in Hong Kong and operated by known short-seller Carson Block, put out a research report last week that said the company overstated its holdings in China and that its financial reporting was tantamount to fraud. Sino-Forest denied Block's claims on Friday, but also indicated that it was going to fully investigate the matter.

Paulson & Co., an investor in Sino-Forest, is also reportedly investigating the claims.

BPZ drops outright

BPZ's 6.5% convertibles due 2015 dropped to the 93.5 bid, 94 offered from the 99 to 99.75 area.

Shares of the company ended down 39 cents, or 10%, at $3.60 each, having pared some of their earlier loss.

"It looks like outright small trades and some size printed," a New York-based sellside trader said.

The securities had recently edged down to just below par, having traded above par with the stock higher in March and April.

The $150 million BPZ convertible isn't very liquid, but it was drawn into trade on Monday after word that chief financial officer Edward Caminos has submitted his resignation "to pursue other professional opportunities," effective June 30.

CEO Manolo Zuniga said that Caminos "helped us evolve from a purely developmental company to a true oil and gas exploration and production company," and he wished Caminos well in the statement.

Richard Menniti will be the interim CFO, effective July 1. The company has hired Preng & Associates to help in the search for a new CFO.

Mentioned in this article:

BPZ Resources Inc. NYSE: BPZ

JA Solar Holdings Co. Ltd. Nasdaq: JASO

Sino-Forest Corp. Toronto: TRE

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