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APP confronts its paper
tigers
By Bill Guerin
A
landmark deal signed in Bali at the end of September
between Asia Pulp&Paper (APP) and its foreign
creditors has evolved into yet another major challenge
for the creditors.
APP, Asia's largest corporate
debtor, is also one of the largest pulp-and-paper
producers in Asia. It is controlled by the Widjaja
family's Sinar Mas Group and has no fewer than 16
manufacturing facilities in Indonesia and China. The
megalith comprises more than 150 companies incorporated
in China, Indonesia, Malaysia, Singapore and the United
States.
APP and some, not all, of the creditors,
led by the Indonesian Bank Restructuring Agency (IBRA),
which is APP's biggest single creditor, signed a
memorandum of understanding in Bali to restructure about
half of the group's massive US$13.9 billion debt.
Between $6.2 billion and $6.7 billion of debt at APP's
four key Indonesian units was to be paid back over 10
years.
The Bali meeting was only the third time
the company had talked with creditors since freezing
debt repayments in early 2001 because of the cash crunch
that followed its massive expansion in the 1990s.
Most of the main creditors, from the US, Japan,
Europe and Canada, are currently in Jakarta to sort the
mess out. They have put past squabbles aside to present
a common front in the face of what they see as a
pronounced bias by IBRA toward the Widjaja family and
are lobbying legislators and ministers as well as making
sure their position is made known through the local
media.
Creditors want changes to the "December"
agreement, so called because it was signed last December
between IBRA and APP. Their consortium, ECA (Export
Credit Agencies), through a Combined Steering Committee
(CSC), has come up with its own version of the deal
which it wants to be aggressively championed to IBRA and
to the government.
ECA wants the establishment
of a new company, APP Trading, to monitor the activities
of the four Principal Indonesian Operating Companies,
(PIOC), PT Indah Kiat Pulp & Paper, PT Tjiwi Kimia ,
PT Lontar Papyrus Pulp & Paper and PT Pindo Deli
Pulp & Paper Mills. These four companies are at
present controlled through an intermediate holding
company Purinusa, which confers ownership on APP.
The Widjajas were at first enthusiastic about
the establishment of APP Trading (formerly APP Capital)
until they were made aware this was to be the vehicle
for independent management to be brought in to oversee
daily operations.
One part of the wish list from
creditors envisaged expatriate managers being placed in
Purinusa to develop and operate the forestry concessions
in accordance with internationally accepted
environmental standards. One of the many important
issues for APP and its creditors is the company's
continued access to cheap and sustainable wood supplies
to keep costs down. Earlier audits have concluded that
APP may have to consider potentially more expensive
alternatives to meet its production targets.
APP
has said that the creditors' statement that the PIOCs
would thus be encouraged to prioritize the supply of
logs from suppliers who meet with sustainable
forestry-management practices is a back-door way of
ensuring protection for APP's competitors abroad. In
other words, they say, the creditors want to eliminate
the "unfair advantage" PIOC has in competing against
other pulp and paper companies. This was seen as a foil
against the part of the wider creditor strategy to gain
control, position themselves close to the Sinar Mas
assets and sources of cash and thus ensure cash in the
group's four Indonesian units is allocated according to
the final debt deal.
Bitter and angry from past
experiences, the creditors are concerned that there
could be a second default and have come up with the
novel concept of tucking the majority of shares safely
away in a trust account to act as a guarantee in the
event of a second default.
Under the plan, 75
percent of PIOC shares would be placed as equity in
trust. Unfortunately, though IBRA and APP in December
agreed to accommodate the two demands by creditors in
their new agreement, insider sources say this has not
been done. Creditors also demand a tightening up of the
group's corporate structure to make it more efficient
and to cut costs.
APP has let it be known that
the Investment Monitoring Board (BPPM) has warned the
proposal by the creditors would violate at least one of
their regulations. Leaks from the Indonesian side have
added to the frustration of the foreigners with both
IBRA and APP reputed to have said they will never agree
to any form of independent executive committee given the
power and authority to monitor the PIOC's cash flows and
operations.
Bapepam, the market watchdog, has
objected to parts of the proposal and even hinted that
the formation of the new entity APP Trading could be a
violation of anti-monopoly laws.
Creditors also
believe the Widjaja family, who trace their ethnic roots
to China, are intent on using the profits from
Indonesian operations to expand in China, the world's
second-biggest paper market. China has also been
identified as a destination for APP funds that have
disappeared.
A restructuring deal for the APP
holding company, which is headquartered in Singapore, is
also in the cards. APP's China operations owe more than
$2 billion to creditors and the family wants to also
reschedule that debt over a longer period. But the
epicenter of the latest storm is the remaining $4.5
billion or so of debt associated with APP's holding
company, which creditors are only now addressing.
APP's creditors have long since given up on the
true financial state of the company as publicized in a
series of reports. At the peak of an earlier cycle of
creditor anguish one creditor proposed the solution that
many observers and analysts see as the only way out of
the impasse. "The best route to recovery lies in
dislodging the family from the company [and] taking over
the operations," said Richard Deitz, president of New
York-based VR Capital, which manages $100 million in
emerging market debt, including Asia Pulp's bonds.
Last May the creditors appointed accounting firm
KPMG to conduct a financial review of the company's
operations including those in China but bondholders
complained that KPMG wasn't given access to carry out
the study in China. Other financial advisors appointed
by the creditors spent months going through APP's
finances and concluded that APP had spent billions of
dollars on several dubious transactions. Some of the
creditors sought redress in the courts but failed.
The Widjaya family has consistently refused to
inject any assets or allow a debt-for-equity swap
although they have pledged some personal assets to IBRA
to counteract the growing public discontent in Indonesia
with recalcitrant tycoon debtors.
The head of
IBRA and the seventh person to hold the position in its
four years of existence, Syafruddin Tumenggung, is
keeping a low profile after his misplaced exuberance at
the luxury hotel in Bali in September when he proudly
beamed that this was the first time ever there had been
an agreement between key creditors and APP in Indonesia.
Efforts to reach a debt-restructuring deal with
APP have been hampered by the sheer number of creditors
and other stakeholders, as well as conflicts of interest
among creditor groups.
At the Bali meeting
Tumenggung said the deal involved mainly institutional
creditors. Others would also be asked to join and had
until March 31 to do so, though at the time it was
unclear how much debt the institutional creditors were
owed by the four Indonesian units.
Even then APP
adopted a threatening stance, with APP's deputy Gandhi
Sulistyanto warning: "If other creditors don't want to
join, they will not get paid."
ECA argues with
enthusiasm that its version of the interim plan, first
mooted by Morgan Stanley, offers several advantages. The
plan, ECA points out, would enhance IBRA's recovery on
bad loans. More than two-thirds of its exposure to APP
loans is from loans to Purinusa.
The ECA plan
assumes APP will earn an average of $750 million a year
before interest, taxes and depreciation. The principal
and interest for some $1.2 billion of the Indonesian
operations' debt will be repaid over 10 years, while
interest only will apply for $3 billion of the debt. A
further $2 billion to $2.5 billion of debt will be
refinanced with a convertible bond.
APP's
forestry concessions, if properly managed and
transparent, could thus generate sufficient surplus cash
to pay off the Purinusa debt in less than three years,
say Morgan Stanley. Most of the hardwood supplies come
from Indonesian forestry concessions held by two
affiliated companies. Both of these companies have set
up reforestation programs to provide APP's Indonesian
mills with a long-term sustainable and renewable source
of hardwood. APP has consistently claimed that its
Indonesian mills will get 100 percent of their wood from
these plantations by 2007.
Other key concerns
relate to issues that are outside the control of the
Sinar Mas Group, such as the regional autonomy in
Indonesia, which has given its provinces and districts
authority and control over forest utilization rights.
Frequent land tenure- and ownership-related
disputes also pose a significant risk to sustainable
wood supply plans. Claims to more than 57,000 hectares
of land were made at one of APP's affiliated forestry
companies, representing 19 percent of that affiliate's
total operations area, prompting fears that an increase
in successful claims escalates would severely impact on
sustainable wood supply plans.
Both the World
Bank and the International Monetary Fund (IMF) are said
to be ready to support a halt in IBRA's sale of loans
and assets belonging to these debtors, the biggest of
which is APP, in advance of a total restructuring of the
forestry sector.
The Center for International
Forestry Research (CIFOR), funded by more than 50
international donors including the World Bank, has been
calling on the government to halt the sale of $2 billion
worth of loans owed by Indonesian pulp and paper firms
and plywood factories. CFOR wants to see many of the
firms bankrupted, in order to reduce the vast demands on
forestry resources.
Indonesia, one of the
world's leading timber-producing nations, grows some 15
million to 20 million cubic meters of timber a year but
this is far from sufficient to service the needs of the
pulp and paper industry. These massive industries need
some 25 million cubic meters of wood every year.
Together with the plywood and furniture sector's
raw-material needs, the annual capacity of the country's
forestry industry is almost 60 million cubic meters from
which Indonesia earns a healthy $10 billion a year.
The APP epic thus has profound implications for
Indonesia and even the region as a whole. The outcome of
the largest debt-restructuring ever seen in emerging
markets will influence investor willingness to invest in
Indonesia.
APP operates in a region where
transparency and good corporate governance are pipe
dreams and where corrupt legal and financial systems are
the rule, rather than the exception. Furthermore, three
separate jurisdictions, Singapore, China and Indonesia,
regulate the holding company and the operating
companies.
IBRA was to present a revamped scheme
on Wednesday that would not only determine the next
action by the frustrated creditors but might also mark a
significant precedent, as the creditors argue, for the
protection of creditors' rights through cooperative
action aimed at recovering asset values from
uncooperative creditors.
(©2003 Asia Times
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