FITCH affirms Sino-Forest at 'BB+'; outlook stable

(The following was released by the rating agency)

May 09 (Fitch) Fitch Ratings has today affirmed Sino-Forest Corporation's (Sino-Forest) Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) at 'BB+' and FC senior unsecured rating at 'BB+.' The Outlook on the IDR remains Stable.

"The affirmation of Sino-Forest's ratings reflects the company's stable business profile underpinned by a solid plantation asset base, adequate corporate liquidity, and sound credit metrics," says Ms. Ying Wang, Director in Fitch's Asia-Pacific corporates team. "However, Sino-Forest's ratings are constrained by its persisting negative free cash flow (FCF) due to significant capex."

Sino-Forest has maintained a proven track record in expanding commercial plantations through acquisitions. At end-2010, Sino-Forest had a sizeable plantation area under management of 788,700 hectares which are primarily in southern and eastern China. Fitch estimates that Sino-Forest's existing timber inventory is sufficient to support about five years of fibre supply. Additionally, the agency notes Sino-Forest has the right to acquire an additional 625,000 hectares of plantation area under its long-term master agreements in the provinces of Hunan, Yunnan, Fujian, Jiangxi and Guizhou as well as the Guangxi region. In March 2011, Sino-Forest signed an MOU to acquire 150,000 hectares of plantation area in central and western China and plans to sign a second MOU to acquire another 150,000 hectares of plantation area in those regions.

Sino-Forest's ratings are further backed by favourable industry dynamics driven by supportive government policies and the domestic wood-fibre supply shortage, as well as its management's solid experience in forestry management with strong business and government relationships in China.

Sino-Forest has maintained comfortable financial flexibility and healthy liquidity despite being a net acquirer of assets. Funds from operations (FFO) have covered about 80% of annual capex in the past three years. At end-2010, Sino-Forest enjoyed solid FFO adjusted net leverage of 0.7x and FFO interest coverage of 12.9x.

Sino-Forest has a back-ended maturity profile with most debt due after 2013. The company has demonstrated its ability to refinance and/or extend debt maturities through a variety of funding channels across debt and equity. Meanwhile, Sino-Forest has established a Co-operative Framework Agreement with the China Development Bank Corporation Guangdong Branch. The latter will provide project financing of up to CNY10 billion (USD1.5 billion) at competitive onshore interest rates.

Sino-Forest's ratings are constrained by its aggressive capex programme which has resulted in consistently negative free cash flow (FCF) over recent years. Fitch expects the negative FCF to persist in the near term given the company's continued expansion of plantation area. However, Sino-Forest has the right but not the obligation to purchase trees under its long term master purchase agreements, providing it some flexibility to slow down purchases if necessary.

The ratings are also constrained by the long-term nature of Sino-Forest's timber inventories, which exposes the company to price risk and cash margin compression. The ratings reflect the inherent risks of weather and natural disasters, the industry's sensitivity to construction and property development cycles, a lack of pricing power, and a high geographic concentration in China.

The Stable Outlook reflects Fitch's expectation that Sino-Forest's financial profile will remain healthy and within a range consistent with its rating category. Sustained positive FCF and a significant increase in revenue contribution from a sustainable integrated business model could lead to a positive rating action. Negative rating actions may result from prolonged delays in harvesting/replanting trees, or FFO/net adjusted leverage exceeding 2.0x on a sustained basis, or FFO interest coverage below 5.0x on a sustained basis.