APP debt restructuring threatens diplomatic furor

APP debt restructuring threatens diplomatic furor

Dow Jones, Jakarta

Asia Pulp & Paper Co. Ltd.'s failure to repay its massive debt
is threatening a diplomatic row between Indonesia and 11 foreign
governments that are urging President Megawati Soekarnoputri to
intervene in the restructuring.

Reaching a debt payback agreement for US$6.5 billion owed by
APP's four Indonesian units has become a test case of Jakarta's
efforts to reform the country's economy and attract foreign
investment, the governments said in a letter sent Monday to
Megawati's office.

Until now, the Indonesian Bank Restructuring Agency (IBRA) -
which is owed $1 billion by APP and is overseeing the
restructuring - has been too lenient on the ailing pulp and paper
company, the letter said.

"We advise you to direct your ministers to exercise the
closest possible supervision over IBRA to ensure a fair,
commercially reasonable and transparent restructuring of APP,"
the governments, including European states and Canada, wrote to
the president.

Export credit agencies of the governments are among hundreds
of creditors owed a total $13.9 billion by APP, which is based in
Singapore and has operations in Indonesia and China.

International creditors are frustrated at what they say is
IBRA's unwillingness to force stringent repayment conditions on
APP's owners, Indonesia's Widjaya family, people familiar with
the talks say. The Widjayas stopped servicing their debt in March
2001 amid slumping global paper prices.

The governments' letter signals the APP restructuring could
break out into a diplomatic row if Indonesia refuses to increase
pressure on the company to repay.

"APP's restructuring is of high political importance to
Indonesia because of its size and the repercussions on
Indonesia's international reputation," the letter said.

An outline debt plan between IBRA and APP signed in December
failed to include provisions to force the company to fully repay
its debt, and ensure against a further default, the letter added.
IBRA has said it wants creditors to agree to the plan by a March
31 deadline.

Export credit agencies of the governments proposed in February
an alternative restructuring that would fix tighter controls on
APP's cash flow, and allow for a takeover of the four Indonesian
units in the event of failure to repay debt in the future.

But IBRA has been reluctant to include these conditions in its
restructuring, people close to the talks say.

The governments pointed out to Megawati in the letter that her
government would need the cooperation of those export credit
agencies to meet its infrastructure spending needs, which are
estimated to total $100 billion over the next 10 years.

"Our government agencies have always supported Indonesia's
economic development and intend to continue doing so," the letter
said. "However, it is likely that a failure to reasonably satisfy
the creditors of APP will affect the confidence of future
potential investors in Indonesia."