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.