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Capital Markets

High-yield debt: Missing the wood and the trees

China-focused forestry company falls behind in land acquisition.

There’s little money, yet, growing on MFF’s trees in China

Investors in a Morgan Stanley-sponsored high-yield issue for start-up Mandra Forestry Finance (MFF) are restive. A $195 million issue of high-yield notes in May 2005 at par has slid to 85c on the dollar since issue last May. Behind the drop is the delay in the acquisition of plantation lands in China’s Anhui province that has set back the company’s business plan by some nine months, according to Standard and Poor’s credit analyst Mary Ellen Olson, prompting S&P in March to issue a negative outlook on its initial B rating.

“We’re obviously concerned about their ability to repay the bonds,” says Olson. “They’ll start to feel the heat about six months before the first [interest] payment and we’ll be taking a much closer look at them then.”

The first interest payment on the notes not covered by an escrow account is due on May 15 2007, at which point the company must also meet certain covenants, including minimum acquired acreage of 140,000 hectares. According to S&P, as at March 31, Mandra had acquired just 17,231 hectares.

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