APP's missed payment alarms Asian bond mart
APP's missed payment alarms Asian bond mart
HONG KONG (Reuters): A missed interest payment by a unit of giant Indonesian corporate borrower Asia Pulp and Paper sent shudders through Asia's bond market on Monday as investors weighed the possibility of group-wide default.
Analysts estimate APP -- headquartered in Singapore, listed in the United States, and with most of its operations and key owners in Indonesia -- has between US$10.4 billion and $10.9 billion of debt outstanding spread over a parent holding company and a range of operating companies.
But while most of the public debt does not carry a direct cross default clause with the parent company, many analysts fear the recent failure of one unit to make an interest payment is a sign the whole company is running low on cash.
"We believe a group default is now highly possible," said David Rubin, research analyst at Nomura International in Jakarta.
"APP may now be husbanding cash to meet working capital requirements after its unsuccessful attempt to convince suppliers to extend credit terms to help debt repayments," Rubin said.
Analysts said one likely trigger of a group-wide default could come through bank loans provided to the operating companies in the APP group, which are backed by the parent.
A second possibility is a default at the parent level on one of the many debt issues it has outstanding, which could stop the company servicing the debt of its operating units.
Concern over the possibility of a massive Asian corporate default escalated when Tjiwi Kimia, a leading Indonesian pulp and paper firm in which APP is the majority shareholder, failed to make interest payments totaling $43.3 million on Feb. 1 due on two debt issues.
The issues were a $200 million bond paying a coupon of 13.25 percent due in August 2001 and a $600 million bond paying a coupon of 10 percent and due in August 2004.
Tjiwi Kimia has grace periods of five working days and 30 working days respectively on the bonds before formally being in default.
The major rating agencies have downgraded Tjiwi Kimia to either being in default or on the verge of it.
Market tremors
The approaching deadline has caused market tremors because for a long time APP-related bonds have been the only tradeable paper for investors looking to hold some exposure to Indonesia.
On Monday bond traders quoted a bid price on APP debt at around 20 cents in the dollar and were offering to sell it 30 cents in the dollar.
"The market seems to be fully pricing in a group default," said a credit trader at one European bank in Hong Kong.
"Non payment by Tjiwi Kimia would also significantly raise the risk that APP will not pay the April coupon due on its bonds," said Stephen Cheng, executive director of credit Research at UBS Warburg in Hong Kong.
UBS Warburg estimates APP has coupon payments on parent company debt totaling $86.5 million due in April followed by full repayment of a $100 million zero coupon one year note in July.
In all the company has an estimated $2 billion in notes, coupon payments and bank loans falling due this year and faces a slumping global market for its products combined with an already tight cash flow.
But UBS Warburg notes cash flows at many of APP's other units such as Indah Kiat Pindo Deli, Lontar and APP China are strong enough to meet debt servicing obligations. The problem is largely confined to the parent company.
"The question is whether APP, if it runs short of cash to repay parent level maturities, will continue to service the operating company debt," said UBS Warburg's Cheng.
Efforts to reach APP officials for comment have not been successful.
Beyond the impact of non-payment by APP of interest due to its note holders there is also the possibility of a wider shakeout across the Asian debt market.
"If APP was to default clearly there will be a fallout from that as funds reallocate and liquidate other positions in their portfolio," said Sanjai Vohra, head of corporate research at JP Morgan in Hong Kong.
"This is paper that does trade and there is a price for it all the time so they (funds) would have been marking it down and now it's a question of what to do with it," Vohra said.
"It's a question of whether the current market level they've been holding it at is a realistic mark," he said.
Analysts believe that for investors left holding the APP paper, the future holds only the prospect of a long debt workout process.
"We expect the debt of all group companies will need to be restructured owing to the cross default conditions between group companies," said Nomura's Rubin.
Any group-wide debt restructuring will require the approval of a large body of creditors.
Last September APP made a debt exchange offer to holders of $1.45 billion of its bonds with a combination of cash up front, new notes and warrants for its American depositary shares.
The exchangeable bond offer required APP to put up a significant amount of cash and the lack of any progress on the deal implies to many analysts a failure by the company to raise this money.