Sometimes, closing your eyes and hoping is the only option. Sino-Forest’s bondholders have done just that, temporarily waiving their right to demand all their money back immediately and thereby avoiding a default. For the time being.
If Sino-Forest were to default on its $1.8bn of bonds, it would be Asia’s largest default by debt outstanding, excluding Japan. It would also be a test of China’s recently improved bankruptcy laws and of offshore creditors’ ability to recover funds.
Sino-Forest had $570m in cash in November. That would cover a third of its total outstanding bonds. But only $230m of that is held offshore and conceivably seizable by bondholders. No wonder they went instead for a classic delay-and-pray waiver. The deal requires the company to keep at least $305m in the bank, and $140m of that offshore. That technically covers the $115m of interest payments due this year. But cash has been shrinking fast; its $1.2bn at the end of 2010 had halved by November. The new $305m floor implies the burn rate has not slowed.