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APP debt woes continue
By
Bill Guerin
Hopes for a quick resolution to the
complex debt-restructuring needs of Singapore-based Asia
Pulp&Paper, the biggest contributor to the biggest
debt in the history of corporate Asia, were dashed this
week.
Indonesia's third-largest Indo-Chinese
conglomerate, the Sinar Mas Group, owes a total of
US$13.9 billion to international creditors. The group's
Singapore-based Asia Pulp&Paper (APP), one of the
world's largest pulp and paper groups, ran up most of
this. APP owns 17 manufacturing facilities in Indonesia,
China and India, and has markets in more than 65
countries.
IBRA, the Indonesian Bank
Restructuring Agency, is owed a modest $1 billion,
though it is still APP's single biggest creditor. IBRA
was instrumental in forcing through a deal after a
marathon three-day session on Bali at the end of
September when a small group of key creditors agreed in
principle to a restructuring plan that covers half of
the group's total debts and obligations. (See Asia Pulp&Paper to cough up cash to
creditors, October 3.)
Next Wednesday, both
APP and IBRA will sign the preliminary agreement in
which APP has agreed to repay creditors $6.5 billion
over 10 years to cover the debt of its four Indonesian
operating companies.
APP and IBRA have both said
they hope all parties will sign the agreed plan, but
creditors have flatly refused to agree to the deal and
are pressing for an alternative debt plan that would
allow them to take "automatic and immediate" management
control of APP in the event of a default. The creditors
want APP to hand a majority stake in the company to an
independent offshore custodian during any restructuring,
and are concerned that only IBRA will be guaranteed
repayment under the plan. They are also wary of the
vagaries of Indonesia's legal system, which they believe
offers little protection for foreign creditors.
The creditors are concerned that IBRA's plan
contains no provisions to ensure that the Widjaya
family, APP's founding shareholders, stick to the
repayment terms of any restructuring. They also point to
the fact that the IBRA plan does not cover restructuring
of the debts of the Singapore-based holding company and
China units, some $7.4 billion.
Creditors want
the Widjaya family to pledge more assets that are
currently not under the APP umbrella as security during
the restructuring.
The creditors range from
institutional bondholders to government agencies and
foreign banks. They include more than 150 companies
incorporated in China, Indonesia, Malaysia, Singapore
and the United States who have long fought to gain some
control over APP and Sinar Mas assets, and 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.
The battle began in March 2001 when APP,
staggering under the huge debt burden, and with many of
its businesses badly affected by the regional financial
crisis and falling commodity prices, was hit by a cash
crunch and called a debt moratorium.
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 coverups so that major
shareholders were unaware of the true nature of the
company's balance sheet.
A due-diligence
process, insisted on by the government, 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 commissioned 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.
Deutsche Bank, BNP
Paribas and Centre Solutions Bermuda Ltd, a unit of
Zurich Financial Services Group, which is 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.
Eka
Tjipta Widjaya founded and built the Sinar Mas family
enterprise into one of Indonesia's greatest success
stories. The business environment of the early 1990s
with its 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, encouraged
such entrepreneurship.
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. 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 APP,
floated on the New York Stock Exchange in 1994.
Expansion in three continents supported by
production in the Far East completed the picture. The
massive tracts of forests the Chinese conglomerate had
acquired in Indonesia bolstered core paper and pulp
expansion.
All this took place in a country
notorious for its poor protection of creditors and
devoid of 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.
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. Lenders must
share some of the blame for this.
The Widjayas
used 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 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. However, it had not done its homework and
soon found that its more luxurious grades of paper were
sorely out of place in a pioneer and very basic market.
This venture, which made APP one of the largest foreign
investors in China, cost $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.
Creditors now want the
Widjayas to pledge assets that are currently not under
the APP umbrella as security during the restructuring,
though the IBRA plan makes no mention of assets such as
those owned by the family in Indonesia, China and
Singapore.
The agreement will still leave the
family in place as operational managers.
(©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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