Asia Pulp & Paper buys back its own debt

Asia Pulp & Paper buys back its own debt

NEW YORK (Bloomberg): One of Indonesia's wealthiest families is taking advantage of the crash in Asia's bond markets to buy securities of Asia Pulp & Paper Ltd., a company it controls.

Sinar Mas Group, through a company it controls called APP Global Ltd., bought back as much as a third of the US$245 million of three-year convertible notes it sold last year, according to people familiar with the purchases.

Sinar Mas, dominated by the Widjaja family, paid about $600 per $1,000 bond, which have an annual interest rate of 2 percent and can be converted into Asia Pulp & Paper stock.

"The family is using it's own cash to repay its own debt," said David Common, analyst at J.P. Morgan Securities Inc.

By purchasing the notes at a discount, Sinar Mas locked in a 45 percent annual return for the next two years because it has to pay investors about $1,230 per $1,000 bond when they come due. It also lowered its interest costs.

The purchases are another sign confidence is returning to Asian countries and companies after economies from Japan to Indonesia sank into recession.

Bonds -- including securities sold by South Korea, Petronas of Malaysia and Hutchison Whampoa Ltd., a Hong Kong holding company -- rallied in the past two months along with Asian currencies and stocks. The Asia Pulp & Paper convertible notes were recently quoted at 74.

Buying the bonds is a vote of confidence in the companies and region, analysts said. "Any time a company buys back debt, that's a good sign," said Terry Buffalo, vice president of fixed income at American Investment Services Inc. in Peoria, Illinois.

Asia Pulp & Paper's American depositary receipts almost doubled since hitting a low of 4 3/4 in August. The ADRs were unchanged at 9 3/8 today.

The purchase is a sign that Sinar Mas -- which owns a thicket of companies in the forest products, financial services, property and food businesses -- has cash and is willing to bet its stock and bonds are undervalued.

Analysts said Asia Pulp & Paper is one of many borrowers from emerging markets that are buying back debt.

Bonds of Asia Pulp & Paper and its subsidiaries, including PT Pindo Deli Pulp and Paper Mills and PT Indah Kiat Pulp & Paper, tumbled along with debt of other emerging market borrowers as economies slowed, Asian nations devalued their currencies and Russia defaulted on its debt in August, driving investors away from all but the safest securities.

Asia Pulp & Paper, roughly 80 percent owned by Sinar Mas, escaped the worst of the rout because it had $2.3 billion of cash at the end of June. Almost 60 percent of its costs are in Indonesian rupiah, while most of its revenue is in dollars. The company, one of the biggest Asian issuers of below-investment grade debt in the U.S., hasn't missed debt payments.

With markets recovering, investors "are looking to see if they can start bottom fishing in Asia," said Mike Casey, who helps manage $450 million of international bonds at Federated Investors in New York.