Asia Pulp & Paper debt plan delay hurts bonds

Asia Pulp & Paper debt plan delay hurts bonds

JAKARTA (Dow Jones): Asia Pulp & Paper's silence over a plan
to restructure part of its huge $10 billion debt to head off a
funding crunch has raised fears that the company may not move
ahead with the deal, analysts say.

Singapore-based APP's bond prices have fallen sharply this
year on worries the company's paper businesses in Indonesia and
China aren't making enough cash to repay $2 billion in debt
coming due before the end of next year.

APP's plan to exchange $3.1 billion of notes for new bonds,
and some cash, which it outlined in September, produced a
momentary pause in the fall in its bond prices.

The plan would have pushed back repayment periods to 2005,
relieving immediate funding difficulties.

But since then, APP has made no mention of the exchange,
fueling investor concern the company doesn't have enough spare
cash for the plan, and leading to calls for the company to sell
non-core businesses to bring down its debt.

"APP bond prices have come down since August amid rumors
they're not going to go ahead with the exchange," said Imogine
Baker, a credit analyst at Barclays Capital in Hong Kong.

Concern over APP's high borrowing to fund expansion in recent
years has forced the company to offer yields of around 25 percent
to attract investors to rollover debt that has come due this
year.

Ballooning interest costs on existing debt, and rising pulp
prices, have eaten into revenues, adding to concern over the
company's short-term funding structure.

Some of APP's 12 actively traded debt issues are now trading
as low as 60 percent down from original issue prices. Many of the
bonds, all of which are distressed debt because of Indonesia's
junk sovereign rating, were trading down only 30 percent at the
start of the year.

Even with a successful restructuring, APP's bonds won't see a
sustained recovery unless the company reduces its debt by selling
non-core assets, analysts say.

Although the exchange plan would reduce immediate funding
difficulties, it would only postpone the problem, eating into
future revenues.

Most of APP's operations are in Indonesia, where it has two
Jakarta-listed subsidiaries - PT Indah Kiat Pulp & Paper and PT
Pabrik Kertas Tjiwi Kimia. That makes APP one of a very few
Indonesia-linked companies to remain active in international bond
markets.

Indah Kiat's shares have dropped recently on the local bourse
on concerns the company's revenues will be siphoned off to repay
the parent's debt.

The stock closed Thursday at 1,000 rupiah (11 US cents), down
from Rp 1,165 in September when the bond exchange scheme was
outlined.

Wijaya family

Analysts say the company should protect its core businesses
such as Indah Kiat, selling off peripheral operations. These
include power plants in China, chemical plants, and packaging
businesses.

"They owe too much money and they don't have enough cash-flow,
so they have to divest non-core assets," said a foreign credit
analyst, who asked not to be named.

In the first six months of this year, APP had negative cash
flows of about $15 million due to the high cost of servicing
debt, and the jump in the price of pulp, the company's main raw
material for producing paper.

But Indonesia's Wijaya family, which controls APP, seems
unwilling to sell assets at current low prices. Indonesian asset
prices have been driven down due to political and social
instability this year, and a slower-than-expected economic
recovery.

"Long-hoped-for asset sales remain just that," said Barclays
Capital's Baker.

APP says it has $1.4 billion in spare cash, but analysts
question how much of this total the company can get its hands on
now. Much off the cash is tied up in time deposits, or with Bank
Internasional Indonesia, a bank closely connected with the Wijaya
family.

The company's slow progress in raising cash from asset sales
has hurt its New York listed stock price. Plans to invest a
further $1 billion in its Malaysian paper joint-venture -
although shelved for the time being - have further added to
concerns.

APP's American depository shares plunged 61 percent to an all-
time low of $1 per share a few days after it announced the bond
exchange plan in September, before rebounding to end at $1.56 -
down 39 percent on the day. At the close Thursday in New York,
the shares were at $1.625.

Still, credit analysts say APP has a number of solid
businesses, and its bonds might offer a good bet at current low
prices for investors that aren't adverse to risk.

With debt of cigarette maker PT Hanjaya Mandala Sampoerna -
one of the few other internationally traded Indonesian bonds -
currently trading at only about 25 percent below original issue
price, APP paper is beginning to look attractive, the foreign
analyst said.