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

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.