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Asia Pulp&Paper to cough up cash to
creditors
By Bill Guerin
Eka Tjipta Widjaya founded the Sinar Mas Group and built
it into Indonesia's third largest
Indonesian-Chinese conglomerate. It now owes the equivalent of more than a
tenth of Indonesia's foreign debt. Ninety percent of
this debt, the biggest by far in the history of
corporate Asia, has been run up by the group's
Singapore-based Asia Pulp&Paper (APP), one of the
world's largest pulp and paper groups. APP owns 17
manufacturing facilities in Indonesia, China and India,
and has markets in over 65 countries.
Sinar Mas
concentrated over the years on pulp and paper,
plantations, finance and property. The group
consistently performed well with exports and was highly
skilled in raising finance and institutionalizing its
businesses through the capital markets. However, the
onset of the financial crisis in 1997 quickly resulted
in the conglomerate being trapped under huge debts, with
many of its businesses badly affected by the crisis and
falling commodity prices.
APP called a debt
moratorium in March 2001 when it was hit by a cash
crunch after aggressive expansion and since then
restructuring negotiations have been colored by
controversy and countless legal challenges. The game
seemed to be up a month later when APP announced that it
had failed to include a US$220 million loss on two
currency swap contracts in its financial statements,
quickly followed by an official announcement that
earlier financial statements for 1997 to 1999 "should
not be relied upon".
Creditors from more than
150 companies incorporated in China, Indonesia,
Malaysia, Singapore and the United States fought to gain
some control over APP and Sinar Mas assets, to protect
themselves against the risk of default. Citigroup, ABN
Amro, General Electric, Zurich Financial Services, BNP,
Deutsche Bank, and export credit agencies, Japanese
trading companies and even some Chinese banks are all
wrapped up in the paper debt.
Efforts to reach a
restructuring deal were hampered by the vast numbers of
creditors and stakeholders, and the conflicts of
interest among creditor groups. Several groups filed
lawsuits in the United States against APP, alleging that
the company had indulged in cover-ups so that major
shareholders were unaware of the true nature of the
company's balance sheet.
A due
diligence process, which was insisted on by the government
last year over a plan to merge Bank Internasional
Indonesia with state-owned Bank Mandiri, showed that Sinar
Mas had also transferred some $250 million to China to
pay back debts there, thus increasing the level of
mistrust and suspicion.
A confidential
2,000-page report from KPMG was released in July,
following a one-year probe that cost APP $12 million and
was commisioned by creditors. The report stated that
creditors wanted "a list of transactions that appear to
have resulted in a diminution in value in separate
companies comprising the APP Group".
The KPMG
financial audits listed questionable transactions and
accounting entries made in 1999 and 2000 by APP's four
Indonesian entities and noted $1.56 billion in
provisions for doubtful debts and reclassification of
receivables as well as $672 million in derivative losses
from various APP units. Other transactions noted,
including $457 million in guarantees for non-APP
companies, brought the total amount in the "suspect"
category to $4.41 billion.
On the heels of this report,
Deutsche Bank, BNP Paribas and Centre Solutions Bermuda
Ltd, a unit of Zurich Financial Services Group, who are
owed nearly $450 million, tried to seek justice in the
High Court in Singapore and moved to put the group under
the management of a team of outside accountants. The
court ruled, however, that it was not convinced a
judicial manager could achieve the debt restructuring
more quickly or effectively than the Widjayas.
APP's total debts and obligations are
a staggering $13.9 billion, and creditors, led by the
state-owned Indonesian Bank Restructuring Agency (IBRA)
finally settled their differences and joined hands in
demanding cash control and a debt restructuring plan by
the end of last month. In the end IBRA, owed a modest $1
billion though still APP's single biggest creditor, was
instrumental in forcing a deal at the eleventh hour.
On the holiday island of Bali last Saturday,
following a marathon three-day session with creditors, a
small group of key creditors agreed in principle to a
restructuring plan that covers half of the total debts
and obligations. APP agreed to repay creditors almost $7
billion over 10 years in a deal which at least covers
the debt of its four Indonesian operating companies.
KPMG concluded in July that APP's two Indonesian
pulp companies, PT Indah Kiat Pulp & Paper and PT
Lontar Papyrus Pulp and Paper Industry, should be able
to repay these debts in full in eight or more years.
However, the two paper companies, PT Pabrik Kertas Tjiwi
Kimia and PT Pindo Deli Pulp and Paper Mills, will only
be able to repay 80 percent and around 40 to 60 percent
of their debts respectively over the same time frame.
The head of IBRA, Syafruddin Tumenggung, was
almost ecstatic when he announced in Bali, "This is the
first step, the first time there has been an agreement
between key creditors and the company in Indonesia."
The non-Indonesian operating unit debt
remains outside the scope of this agreement. APP director
Gandhi Sulistyanto warned, however, that "If other creditors
don't want to join, they will not get paid."
Sulistyanto has been warning creditors that 300,000
jobs could be at risk and said, "as long as the working
capital can be covered and it does not affect our labor
situation then it's all right. Please understand, if it
affects the workers then the social effects will be more
costly than our consensual restructuring process."
In other words, that is an attempt to force on
creditors the responsibility for any job losses caused by
them trying to recover funds that were grossly abused
by Sinar Mas. The truth is, the 1997 financial
crisis exposed these empires for what they were. They
talked themselves up as conglomerates and stakeholders in
the country's future but were, in fact, bereft of
management skills and financial prowess. Sulistyanto denies
that APP's problems were caused by mismanagement and said, "It's
really because of the outside economic effects and the
collapse in paper prices."
Certainly lenders
must share some of the blame. Fundamental principles of
banking were widely ignored by both lenders and
investors, encouraged by the Asian Tiger syndrome and
the obvious success achieved in Indonesia in the Suharto
development era.
The Widjaya's Sinar Mas family
enterprise was always seen as a great success story for
Indonesia. The business environment of the mid 1980s to
early 1990s encouraged entrepreneurship, with its blend
of fast deregulation of trade barriers, the opening up
of previously closed sectors for investment, and a fast
track deregulation of the financial sector which created
large pools of domestic funds.
Liberalization of
the financial sector and capital markets went ahead at a
fast clip, with the total number of banks increasing
threefold from 1988-1992, creating enormous amounts of
funds available for domestic credit. At the same time
there was a major increase in the capitalization of the
brand new Indonesian capital market. These
conglomerates, though still operating in a closed and
protected environment, thanks to Suharto ties, were
accorded access to pots of gold to fund expansion and
leverage, a veritable pioneering scenario. The
temptation to borrow and expand must have been
overwhelming.
Leveraging upon their renowned
trading abilities, Sinar Mas took advantage of export
incentives to expand into other markets, diversifying to
offshore and regional production bases in a classic
strategy to reduce their risk in any single country.
Acquisitions and joint ventures added to
the dynamic growth, and their pride and joy, the Singapore-based
APP, floated on the New York Stock Exchange in 1994.
Bold expansion into global bond markets culminated with
a 30-year bond issue in 1997, a maturity term rarely
seen in Asia.
Expansion in three continents
supported by production in the Far East completed the
picture. The massive tracts of forests they had acquired
in Indonesia bolstered core paper and pulp expansion.
All this was taking place in
a country notorious for its poor protection of
creditors and without bankruptcy laws. The upshot, in many
cases, was unsound investments and over-capacity, which
left these mega-enterprises vulnerable to the crisis when it
came. Such legal lending limits as were in place were
ignored, and the key was leverage. Growth came from
leverage and drove returns on equity ever higher, thus
perpetuating the rosy scenario.
The Widjayas had
been able to use debt to leverage the value of their
companies and subsidiaries without losing controlling
share, and raised funds in the capital market while
cleverly retaining majority control by restricting the
share issues. The weak regulatory environment meant that
new shareholders and institutional and domestic
investors were never able to exert control.
The
ability to borrow at cheap offshore interest rates for
domestic-oriented projects led to the faulty premise
that Indonesia was one of Asia's most rewarding economic
tigers.
The folly of borrowing in the world's
strongest currency, the dollar, and servicing the loans
with receipts in one of the world's little known
currencies, the rupiah, was made even worse by the
maturity mismatch inherent in borrowing short and paying
long. Straying too far from core businesses into
property and infrastructure projects meant the whole
pyramid was a disaster just waiting to happen.
In an incestuous money-go-round, creditors and
banks had been lending to their own group of companies
in a Wild West-like financial environment with little or
no governance. The rest is history.
The
potential of the Chinese market, expected to need a huge
amount of paper products, had been too much to resist,
and APP went for gold. Sinar Mas had not done
their homework and soon found that their more luxurious
grades of paper were sorely out of place in a pioneer
and very basic market. This venture cost APP $4 billion
in state-of-the-art factories and a China-wide network
of sales offices. Worse, the timing coincided with a
depression in pulp and paper prices
And yet, now
the 79-year-old Eka, whom Forbes named in 1997 as the
45th richest man in the world with a net worth of over
$5 billion, remains untouched by the debt collectors. He
travels around in a flashy sports car, flamboyantly
dressed, and with a penchant for women. He is said to
have as many as 12 wives who have brought a total of 40
little Widjayas into the world, many of them now running
the businesses.
At least, IBRA has succeeded in
enforcing its demands that the Widjaya family give up
its ownership in Bank Internasional Indonesia in April 2002.
In
the Bali deal, however, there has been no forced
pledging of Eka's vast personal assets, nor an agreement
from the Widjayas to inject any assets or allow a
debt-for-equity swap. The agreement still leaves the
family in place as the operational managers. The birds
are coming home to roost now but the creditors,
including the Indonesian government, investors and
minority shareholders, are left to sort out the mess,
while the conglomerate owners like old man Eka walk off
into the sunset still proud and rich.
(©2002
Asia Times Online Co, Ltd. All rights reserved. Please
contact content@atimes.com for
information on our sales and syndication
policies.)
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