APP's rating implication negative

APP's rating implication negative

JAKARTA (AFX-ASIA): Standard & Poor's said it has revised the
CreditWatch implications on its CCC+ long-term local and foreign
currency ratings on Asia Pulp & Paper Co Ltd (APP) and its
operating subsidiaries to negative from developing.

"This action reflects the dwindling prospects for affordable
refinancing of APP's upcoming maturities as a result of the
decline in its debt prices and equity market valuation since the
company filed a consent and exchange offer with the U.S.
Securities and Exchange Commission last September," S&P said.

"As such, Standard & Poor's believes that the prospect of an
upgrade from the CCC+ level is unlikely in the near term," it
said.

It said the ratings of APP and its operating subsidiaries,
"reflect significant refinancing pressure for the APP group,
resulting from its heavy debt maturity schedule over the next few
years and the exposure of its mill and resources to Indonesia's
risky political, economic, legal, and regulatory environment," it
said.

The agency said the company's particular challenges have been
compounded by the slowing U.S. economy, which has contributed to
a general weakening of pulp and paper prices, and deterioration
in the high-yield debt market generally, leaving APP vulnerable
to any adverse developments on a number of fronts.

"Although the commissioning of recently constructed mills and
greater expansion into Chinese and Japanese markets will
strengthen cash flow and diversify country risks, the debt
reductions needed to achieve a longer-term financial equilibrium
are only likely if the company can raise significant cash through
asset sales or new equity issuance," it said.

The agency said even if APP, the parent of Tjiwi Kimia and
Indah Kiat, is successful in raising external funds, funding is
likely to remain costly and refinancing uncertain in the medium
term. Moreover, failure to obtain new sources of funding could
put the group in a severe liquidity squeeze.

"APP's heavy use of the high-yield market ... now leaves it
exposed to that market's current lack of liquidity," it said.

"This, in turn, has driven risk premiums to potentially
unmanageable levels despite the benefits of the low operating
cash costs, extensive operational integration, access to abundant
fiber, and diversity of production facilities and end markets
that the company enjoys."

It said although the company's modern, low-cost mills have
long been the subject of interest from major forest products
companies, the volumes of debt outstanding and exposure of prime
assets to the risky Indonesian environment, "make the raising of
sufficient funding at affordable prices or reasonable values an
uncertain prospect."