Asia Pulp and Paper's investors may not cut to default option

Asia Pulp and Paper's investors may not cut to default option

HONG KONG (Reuters): As forest products group Asia Pulp and
Paper (APP) lumbers toward a potentially huge debt crisis,
analysts say one missed interest payment may not necessarily fell
Indonesia's giant corporate debtor.

They said the very size of the debt outstanding, estimated at
up to $11 billion; the wide range of operating companies in the
APP Group, many of which are still very solvent; and different
levels of self interest among the company's wide range of
creditors could prevent the company from going under.

"To avoid being reduced to the lowest common denominator maybe
you as a bond holder hold off calling default. It might be the
better tactic," said Alan Green, credit analyst at Barclays
Capital in Singapore.

"Potentially you could hold your fire and the company may, in
the course of time, be given a grace period because no other bond
holder sought to pull the plug on it," Green said.

Last week APP's unit Tjiwi Kimia missed two coupon payments
totaling about $43.3 million due on outstanding bonds setting off
widespread concern that the company may be heading into a default
situation.

On Tuesday, Tjiwi Kimia made one of the overdue interest
payments on some 1997 bonds worth $30 million considerably easing
default concerns over the group.

However a remaining $13.3 million payment , which is due to
some 1994 bonds, remains outstanding and must be paid by the
beginning of March, or the company faces being in default again.

UBS Warburg also 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.

Technically if Tjiwi Kimia misses the next payment in March it
could be in default.

"In light of the complex cross guarantee structure of APP,
Tjiwi Kimia's default will trigger cross default of APP, its
parent company," said Jon Jonsson, a director of fixed income
research at Merrill Lynch in Hong Kong.

Jonsson said this would further trickle down to APP's sister
companies APP China, Indah Kiat Pulp & Paper, Lontar Papyrus Pulp
& Paper Industry and Pindo Deli Pulp and Paper, thus creating a
massive corporate debt default.

However, even on this point analysts aren't in agreement and
some say the operating structure put in place by APP's management
considerably muddies the water on the likely course of events in
the immediate future.

"The problem is the way they have structured the group. It's
not clear to me when the cross default clause is triggered," said
Warren Mar, Asian head of fixed income research at Banque Paribas
in Hong Kong.

Mar believes a cross default would only occur if one of APP's
subsidiaries were declared bankrupt or insolvent.

"The fact that a bond goes into default is not a declaration
of bankruptcy, and it could take some time to get through the
courts," Mar said.

APP being headquartered in Singapore, listed in the United
States, and with most of its operations and key owners in
Indonesia, it could fall under any of these jurisdictions.

Analysts say typically a cross default would only occur when
25 percent of the bondholders notify a bond's trustees they have
not been paid and the trustee have to then notify the lender it
is in default. All of which can take some time.

The geographically wide group structure is also matched by an
equally wide range of creditors, with most of the long term
dollar-denominated debt believed held by U.S. investors and
smaller amounts in Europe and Japan.

Up until recently, promoters of APP were selling the debt on
the basis that the company had U.S. dollar revenues with its
costs in Indonesian rupiah and access to a very cheap supply of
tropical forests.

Even now analysts say this is one reason why bondholders with
investments in some of the Indonesian forestry units may not wish
to see a group-wide default. They believe their debt has greater
value than the average return which might be achieved from a
major restructuring.

"If you're a Tjiwi Kimia bondholder and you think you've got a
better position than an APP bondholder because you're part of an
operating subsidiary, you think why put this thing into default,"
said Alan Green of Barclays Capital.

"In broad terms you can say APP group debt as a whole is worth
about 35 cents on the dollar, and then some of the holding
companies should only get 20 (cents), while some in the
Indonesian operating companies should get 45 or 50 cents in the
dollar," Green said.

Much of the short term debt and floating rate notes are also
believed to be residing in the vaults of banks around the region
including Taiwan, Korea, Japan and Singapore.

It is possible, since APP is headquartered in Singapore, that
short term debt is being held by the banks without the kind of
risk provisioning required for an Indonesian firm.

This may be another reason bond holder might not want to seek
an early move into default.