APP spooks investors over $2b debt terms
APP spooks investors over $2b debt terms
HONG KONG (Bloomberg): Asia Pulp & Paper Co., one of the few Indonesian companies that didn't default during Asia's financial crisis, is now under fire for trying to change the terms on $2 billion of debt.
Asia's largest pulp and paper company outside Japan last month asked investors to accelerate repayment on part of the debt and to roll over the rest by issuing warrants and new longer-dated bonds that pay more interest.
The plan sent APP stock tumbling by almost a half on concern higher debt servicing costs will slash future earnings.
What irks investors is that APP's problems are a result of its own expansion rather than a slack forestry market. Its sales rose by a third last year as pulp prices gained and a weak rupiah made the output from its Indonesian forests more competitive on global markets. Yet the company made little progress on a two-year-old pledge to sell assets and reduce debts.
"People are disappointed that the capital expenditure hasn't come down and that it hasn't fulfilled its promises to reduce debt," said Jiffriy Chandra, a fund manager at Income Partners, which manages $550 million of bonds in Asia.
APP officials didn't respond over the past two weeks to requests for comment.
Founded in 1972, APP is a Singapore-based holding company that runs 17 pulp and paper plants in Indonesia, China and India. It's the jewel of the Sinar Mas Group's business empire, an Indonesian conglomerate with businesses in palm oil plantations, refining and banking run by the family of Eka Tjipta Widjaja.
APP's sales have gained steadily over the last three years, rising 31 percent last year to $3.1 billion. In the first six months of the year, the company earned $45.5 million, on sales of $2.1 billion.
The trouble is the company's debt burden has also been growing apace: The company has tapped $6.5 billion from global capital markets in the four years to 1999, including $2.7 billion to build expand its operations in China.
Most of APP's earnings come from its Indonesian units, PT Indah Kiat Pulp & Paper and PT Pabrik Kertas Tjiwi Kimia, and APP China Group Ltd. However, conditions on bonds issued by these units restrict the amount of cash they can transfer to APP, the holding company, to pay its obligations.
The holding company needs to repay $647.3 million it owes next year and $1.2 billion in 2002. To ease the crunch the company is offering to exchange the debt for a combination of cash, new bonds that pay more interest and warrants, it said in its initial filing with U.S. regulators.
It will pay up to 45 percent in cash on $250 million of debt due next October, plus new bonds that come due in 2005 with a fixed 15 percent interest rate. It is offering different terms for three other bonds due in 2002, 2003 and 2012.
In its 1998 annual report, APP President Teguh Ganda Wijaya said the company planned to achieve a debt to equity ratio of one-to-one by 2002, to reduce debt by up to $2 billion next year, to sell non-core assets to reduce its obligations, and to stop any new capacity expansion and capital expenditure.
Instead, debt has increased 14 percent since the end of 1998 to $11.4 billion. A six-fold increase in capital expenditure in the second quarter raised concerns that the company may start spending again.