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."