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.