APP debt restructuring

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.