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.