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."