muddy waters

Fitch withdraws Sino-Forest rating

July 14, 2011: 11:41 AM ET

The ratings agency wants more information from Sino-Forest, and the embattled Chinese company refuses to comply.

FORTUNE -- The news just got a little worse Chinese forestry company Sino-Forest. Fitch announced Thursday that it will no longer rate Sino-Forest bonds because it isn't getting sufficient information from the company.

Fitch, one of world's three largest ratings agencies, asked Sino-Forest for "a more frequent and regular update of its offshore cash balances." The agency also wanted to know how management intends to handle the structure of the business, which analysts describe as quite convoluted. Fitch said that the information is "critical to monitoring the position of Sino-Forest offshore creditors, particularly given that under the current business structure offshore obligors are unable to directly access the company's onshore cash flows."

Sino-Forest management, in turn, told Fitch that it can't provide anymore information until a committee formed to investigate the company publishes its findings.

Fitch's decision to withdraw a rating altogether is the latest in a series of blows sustained by Sino-Forest [SNOFF] this summer. To recap: Muddy Waters Research, a firm founded by short seller Carson Block, released a report in early June that called Sino-Forest "one of the rare frauds that is committed by an established institution." According to Muddy Waters, the company used a complex business structure to exaggerate the value and amount of its assets.

Sino-Forest shares plummeted on the report. Shareholder and hedge fund master John Paulson lost money on his investment in the company, apologized to his investors, and dumped the stock altogether. Ratings agencies issued downgrades, and the company's bond prices took a dive. Analysts stopped covering the companyinvestigations into Sino-Forest began, and investors and regulators began to scrutinize other publicly traded Chinese companies as well.

Since the controversy began, Sino-Forest has denied the accusations, but refrained from providing information that could prove its innocence. As Hong Kong's finance minister John Tsang has told the press, that's just not good enough.

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