APP considering merger of four Indonesian units

JAKARTA (JP): Singapore-based Asia Pulp & Paper Company Ltd (APP) is considering merging its four Indonesian units to speed up the company's complicated debt restructuring process, a senior executive of the group said here on Monday.

The chief financial officer of APP's publicly listed subsidiary PT Pabrik Kertas Tjiwi Kimia, Gunawan Taslim, said that APP was evaluating whether a merger of its four units would benefit the debt restructuring process.

"If the disadvantages (of merging) are too many, then we won't do it," Gunawan told reporters following a public expose on APP's two publicly listed pulp and paper companies, Tjiwi Kimia and PT Indah Kiat Pulp & Paper.

The company's other two subsidiaries are PT Lontar Papyrus, which produces pulp and tissue, and PT Pindo Deli, which makes paper, tissue and packaging.

However, Gunawan declined to say how merging the two companies would speed up APP's debt restructuring process.

Merging subsidiaries is advantageous for unloading some of the corporate tax burden, and it might prop up the companies' combined value in the event of a debt to equity swap.

The New York-listed and Indonesian controlled APP is facing heavy pressure to settle its more than $12 billion debts to local and foreign creditors.

APP's relations with its creditors worsened when it suspended all debt payments last month to allow its subsidiaries to resume normal operations.

APP said that low pulp and paper prices and financial constraints were plaguing its operations in China and Indonesia.

Any debt repayments, the company said, were prioritized to its suppliers and trade creditors to enable its units to remain in operation.

APP, one of the world's largest pulp and paper groups, which is owned by Indonesia's Sinar Mas Group, has a pulp capacity of 2.3 million metric tons, and a paper and packaging material capacity of 5.7 million tons.

The company owns 17 manufacturing facilities in Indonesia, China and India, and markets its products in over 65 countries.

On Monday of last week, APP asked creditors for new loans of $200 million to stabilize its operation in Indonesia.

"Our first priority at this time is to stabilize our operations and allow time for working capital to build up in order to support them," APP chief financial officer Hendrik Tee said.

APP argued that stabilizing its Indonesian unit's operations was vital for the faster servicing of its debts.

Gunawan said the $200 million loan could raise the average production utilization rate of the four companies to around 95 percent from the present 80 percent.

However, Gunawan that the $200 million was a rough estimation of the actual amount needed by APP's Indonesian units.

"This (amount) is still being calculated," he said, adding that the company would therefore not submit any loan proposals just yet.

He said that without the new loan, the debt restructuring would take much longer given the companies' lower production utilization rates.

According to Gunawan, APP had opted to seek the new loan as it would allow them to avoid selling products for cash, which required the offering of big price discounts.

He said that without the new loan, APP's Indonesian units would have to continue selling their products for cash, for which buyers were demanding a discount of between 2 percent and 9 percent.

"Can we afford this (discount)? It's cheaper if we take out the new loans," Gunawan told participants at the public expose.

But analyst Edhi Widjodjo of PT Ciptadana Sekuritas said that the chances of APP obtaining fresh loans either from existing or new creditors were slim.

To entice the creditors, APP has said it would place the new loans outside those put under the debt standstill position.

Edhi said this policy could elicit a bad response from the other creditors who would demand equal treatment.

"Any new loan proposals must first go through the creditors' steering committee for approval," he said.

Tension among APP's creditors is also high as the foreign creditors fear that the Indonesian government, which is one of APP's largest creditors, will be given priority under any debt restructuring deal.

The Indonesian Bank Restructuring Agency (IBRA) took over APP's Rp 12 trillion (about $1.1 billion) debt to local Bank Internasional Indonesia (BII), which is also partly owned by the Sinar Mas Group.

Last week, a Sinar Mas official admitted that Indonesia's unfavorable business climate made it difficult for APP to attract new creditors.(bkm)