APP debt restructuring

Foreign creditors, who in the 1990s were falling all over each other to lend to the Singapore-based Asia Pulp & Paper Co., have asked their governments to pressure President Megawati Soekarnoputri to intervene in the process of restructuring US$6.5 billion in debt owed by APP's four paper subsidiaries in Indonesia.

The wishes of the foreign creditors were conveyed in a letter co-signed by the ambassadors of Canada, nine European countries and Japan earlier this week. The letter urged the President to order her ministers to supervise the Indonesian Bank Restructuring Agency (IBRA), another major creditor of APP, to ensure the fair, commercially reasonable and transparent restructuring of Asia's largest paper producer.

The 11 governments warned that the failure to reach a reasonable debt restructuring deal could further erode foreign investor confidence in Indonesia, and would dry up the new lending from foreign export credit agencies that the country badly needs to expand its infrastructure.

This intervention, coming three weeks before an IBRA-led group of creditors is supposed to close a consensual debt restructuring deal with APP, provides a new twist in the saga of APP's default on over $12 billion in debts in March 2001, more than $6.5 billion of which was owed by APP's four Indonesian paper units.

It is worth recalling how in the 1990s and even until early 2000, three years after the 1997 financial meltdown in Indonesia, foreign creditors were competing with each other to lend to APP, lusting after its astronomically expanding businesses with little regard to prudential credit assessment.

The creditors and foreign investment banks, which aggressively peddled APP securities to U.S. bond and stock funds, should have known that APP's huge expansion in the paper industry in the mid- 1990s, which astronomically increased its debts to over $12 billion, had been out of control and that the paper business had always been cyclical.

But now, with their credits having turned sour, the creditors want the Indonesian government, which had nothing to do with the loans, to intervene to salvage their credits.

The 11 export credit agencies claim that the repayment terms and the timetable of the deal that IBRA will conclude with APP later this month are too lenient. They also believe the deal does not stipulate strong measures to discourage APP from another default, nor does it allow for proper scrutiny by creditors of APP's deals, cash flow and control of its assets.

The fighting between IBRA and the 11 foreign creditors seems to have been caused partly by a lack of mutual trust. The export credit agencies, aware of IBRA's advantage resulting from Indonesia's regulatory authority over APP's four local paper companies, and of IBRA's notorious reputation for often pushing questionable deals with conglomerate debtors, felt that their interests had been largely ignored in the debt reorganization.

On the other hand, IBRA, which is faced with a February 2004 deadline to complete its mandate and an urgent need to safeguard its more than $1 billion in credits to APP, connected to the government takeover of Bank International Indonesia from the Widjaja family, the controlling owners of APP, seems impatient with the debt restructuring process, which has now gone on for almost two years.

Few details are available about the preliminary restructuring deal, which IBRA and a group of other creditors signed with APP in December and which is scheduled to be finalized later this month. But APP has invited, through advertisements in the mass media, other creditors willing to participate in the agreement to submit relevant claims.

However, with or without the foreign governments' intervention it is nonetheless well advised for the government to take a second look at the terms of the agreement before it is finalized.

The assessment should focus on the viability of the business plans on which the repayment terms and timetable are based, and on the provisions related to creditor oversight of APP's operations to ensure that the group fully implements good governance with high standards of accountability and transparency.

All creditors certainly have the same interest in having APP operate soundly and profitably, without which their chance of recouping even a fraction of their loans may be jeopardized.

But APP will never be able to resume sound operations if the repayment terms and timetable are so harsh as to cause APP to carry unsustainable debt burdens. Hence, some debt write-offs are imperative if the creditors are serious about reaching a sensible debt deal. After all, the creditors should also pay the costs of their reckless credit decisions.

The creditors also should realize that further delays in the financial restructuring will worsen the uncertainty over APP's ownership status, demoralizing the managements of its business units and damaging the quality of the APP assets with which their loans are secured.