APP woes not over despite payment

APP woes not over despite payment

HONG KONG (Dow Jones): Although Indonesia's PT Tjiwi Kimia
managed to meet an interest payment missed last week, bond market
observers say liquidity problems for its parent, the U.S.-listed
Asia Pulp and Paper Company Ltd., aren't yet over.

More coupon payments are coming due over the coming weeks,
keeping the APP group under pressure as it seeks to raise funds
to meet those deadlines.

APP is the largest producer of pulp and paper in the region
outside Japan, and is controlled by the privately held Sinar Mas
Group, the second largest conglomerate in Indonesia. With some
US$11 billion worth of debt, the APP group is also the region's
biggest corporate borrower.

On Feb. 1, Tjiwi Kimia missed interest payments worth US$43.25
million, ringing alarm bells throughout the financial community
that a default could trigger cross-defaults on other APP
companies, and exacerbating the liquidity problems of the group.

After several days of silence, the parent company APP
announced late Tuesday that Tjiwi Kimia had made a late payment
of US$30 million within a grace period which ended Feb. 8.

However, it has yet to pay the coupon on a second set of Tjiwi
Kimia bonds which also fell due the same day. APP warned in its
Tuesday announcement that "the holders of the 1994 bond will be
entitled to act if a US$13.25 million payment is not made within
30 days of Feb. 1."

The company hasn't indicated whether Tjiwi Kimia will be in a
position to make the second payment before its grace period is
over in early March.

Moreover, between now and Apr. 30, the APP group has to find
some US$145 million for nine coupon payments coming due during
that period, according to estimates by UBS Warburg.

Apart from having to cough up the US$13.25 million for Tjiwi
Kimia in the next month, APP itself has to pay an estimated US$87
million of interest payment on four bonds.

The first of these is for a coupon payment on APP preferred
shares. The payment is due Feb. 15, but isn't considered a major
problem for APP as a deferral of interest payment on preferred
shares isn't considered as a default.

APP didn't always have liquidity problems. At least, if it
had, they weren't apparent. But analysts are now scratching their
heads over how its cash position deteriorated so quickly.

Just a couple of years ago, APP bonds were the darling of
Asian credits among foreign investors, said one analyst, because
most of its revenues are in U.S. dollars while the bulk of
production costs are in Indonesia rupiah.

APP also used to display a high level of transparency. The
analyst remembers that APP's bond prospectus used to be about 300
pages long, filled with financial information on the company.
That compares to 100 or so pages for most bond offering
prospectus.

But analysts say that APP became too eager in its expansion
and raised too much debt without enough foresight to anticipate
the current liquidity crunch that resulted from APP's debt
maturity mismatch.

About 24 percent of APP's US$11 billion debt is maturing in
the next two years. According to S&P, APP's current debt-to-
capital ratio is between 65 percent and 70 percent.

Just last June, APP showed a cash position of US$1.6 billion
on its balance sheet. But analysts and creditors are starting to
raise the "question as to whether the cash really exists," said a
European analyst.

APP's lack of transparency and its failure to explain why
Tjiwi Kimia missed the payment despite various estimates that the
company had the cash to make the payment on time have left many
wondering what really is going on within the group.

Others agree that APP's complex structure makes it difficult
to track how assets and cash are moving around the group - a web
of cross-holdings. Its wholly and majority-owned subsidiaries and
affiliated companies are owned by APP's controlling shareholders
that hold the company's main forest resources.

"Maybe (APP) is sending a message to the market that its
financial situation isn't good (and) creditors now could be more
eager to sit down to renegotiate (APP's) debt," said another
analyst who called it a "tactical default from Tjiwi Kimia."

Observers say that APP will have more and more difficulty
servicing its debt in the near term, and will need to undergo a
restructuring.

By threatening a total default, APP could be in a better
position to negotiate with its creditors on more favorable terms
to APP. So Tjiwi Kimia's near default could have been a "tactical
default," said the analyst.

But others dismiss the tactical default, noting that APP is
just plainly in big trouble.

At Tuesday's press release, APP's Chief Financial Officer
Hendrik Tee confirmed that "we are working with our advisors to
analyze and consider various financial options to reduce APP's
total obligations, consolidate the maturities of our outstanding
debt and enhance our liquidity."

Meanwhile, Standard & Poor's upgraded Tjiwi Kimia's US$600
million notes to 'CC' from 'D' following the payment this week.

But the credit rating agency warned that it "would regard as a
default any debt restructuring that requires creditors to take a
reduction in value of their financial exposure to the group."