APP Finance's preference shares rating lowered to 'D'

JAKARTA (JP): Standard & Poor's has lowered its triple-'C'- minus rating to `D' on the US$375 million unsecured, cumulative, redeemable preference shares issued by APP Finance (II) Mauritius Ltd. (APPIIM) and guaranteed by 100 percent-shareholder Asia Pulp & Paper Co. Ltd. (APP).

At the same time, Standard & Poor's removed the rating from CreditWatch where it was placed on Jan. 19, 2001.

Standard & Poors said in a statement on Saturday that the rating action followed APPIIM's nonpayment of a $11.25 million quarterly dividend on the preference shares on Feb. 15, 2001.

Standard & Poor's ratings on APP, its operating subsidiaries--PT Indah Kiat Pulp & Paper Corp. Tbk., PT Pindo Deli Pulp & Paper Mills, PT Lontar Papyrus Pulp & Paper Industry, and APP China Group Ltd.--and their guaranteed subsidiaries remain at `CCC'-minus and the rating on APP's other operating subsidiary, PT Pabrik Kertas Tjiwi Kimia Tbk. (Tjiwi Kimia) remains at `SD'.

Although APPIIM has the legal ability to defer dividend payment on the preference shares, such a deferment is effectively a default from the perspective of the holders of this issue in the view of Standard & Poor's.

Under the terms of the APPIIM preference shares, APP guarantees full payment on all unpaid dividends related to the issue.

APP is not obligated to make any payment in respect of dividends, however, if such a payment exceeds its distributable profits (on an unconsolidated basis) as defined under the Singapore Companies Act. While the preference share offering documents state that APP should promptly cause, or take all such steps as are reasonably necessary to cause, payments to be made to it by its subsidiaries such that its guarantee payments can be made in full, this is uncertain owing to the group's current financial distress.

The full ramifications of the nonpayment of the preference share dividends will depend on whether and when conditions are met to invoke the parent's guarantee. Recent group tactics in response to growing liquidity problems make each upcoming debt and dividend payment by the parent or its subsidiaries uncertain.

In addition to the nonpayment of the APPIIM preference dividends, Tjiwi Kimia did not make a $13.25 million interest payment on Feb. 1, 2001 on its $200 million notes. In the event that it does not do so within a 30-day grace period, APP and its operating subsidiaries could be subject to an acceleration of debt.

The highly integrated nature of the group's operations, including wholly and majority-owned subsidiaries and affiliated companies owned by APP's controlling shareholders that hold the group's main forest resources, make further defaults by some or all of the rated companies likely.

Despite the group's competitive cash cost position, scheduled payments on debt obligations could be missed in order to maintain liquidity and fund working capital requirements, amid softening pulp and paper prices, which will reduce operating cash flows. Standard & Poor's would regard as a default any debt restructuring that requires creditors to take a reduction in value of their financial exposure to the group.

Although the APP parent is domiciled in Singapore, the location of the bulk of the group's subsidiaries and operating assets in Indonesia and China would make it very difficult for creditors of the group to protect and enforce their rights and remedies, if a series of defaults unfold.