Sino-Environment: Major shareholder in default

Controlling shareholder in default. Sino-Environment Technology Group (SINE) has announced last night that its controlling shareholder - Thumb (China) Holdings (TCH) which is wholly and beneficially owned by SINE chairman and CEO Sun Jiangrong - is in default of certain financing obligations owing to hedge funds. It appears that TCH has pledged 190.8m shares (56.29% of SINE) as collateral for notes amounting to S$120m;although TCH has repaid some S$55m well before maturity, the S$65m has come due on 16 Feb 2009. But due to the current global financial crisis, TCH has not been able to raise sufficient cash to repay the hedge funds. And to make matters worse, talks between the parties have failed as they were unable to reach an agreement on the hedge funds' demands for additional collateral.

Possible forced sale of SINE shares. As such, the hedge funds have given notice to TCH that they intend to enforce their security interests - including the possible forced sale of part or all of the 190.8m shares. While the forced share sale will have an immediate adverse impact on the share price, there are other more serious implications. Besides the possibility of losing the services of Sun, the current business contracts may also be adversely affected - the company warns that it cannot rule out the possibility that these uncertainties could lead to the cancellation of contracts by its customers.

Doesn't rain but pours. And importantly, the possible change in control could also put the company's ability to continue to operate as a going concern into doubt - such action is likely to trigger the convertible bond (CB) holders' rights to ask for conversion or redemption of the outstanding S$149m debt as well as crystallize the default on the corresponding swap arrangement with the CB holders (SINE already booked RMB226m (S$49m) of MTM losses). As of end-Dec, the company's encashable assets (cash + receivables - S/T debt) stand at RMB1118m (S$243m).

Suspending coverage. Although the board is assured by TCH that Sun will use his best endeavours to protect shareholders' interest, it warns that there is no certainty that such efforts will be successful given the current credit crunch.

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