Asia Pulp & Paper takes steps to cut debt

Asia Pulp & Paper takes steps to cut debt

WASHINGTON (Bloomberg): Asia Pulp & Paper Co Ltd has embarked on a series of financial steps -- including an exchange offer, a stock offering and possible asset sales -- to obtain critical cash and slash the company's US$9 billion debt load.

One of the world's lowest cost producers of pulp and paper, the Singapore-based company said yesterday that it would seek to shave off as much as $2 billion of debt by the end of 2001. That would ease the company's interest expense and strengthen its balance sheet, possibly boosting the price of its outstanding bonds.

Since 1994, Asia Pulp & Paper, controlled by one of Indonesia's wealthiest families, tripled its paper production capacity and raised its pulp manufacturing capacity by 80 percent. However, the company financed the expansion by loading on debt, only to see local markets weaken when the Asian financial crisis hit.

The company provided key details on its debt reduction plan in a filing with the U.S. Securities and Exchange Commission to sell 40.3 million American depositary receipts, each of which represents four ordinary shares.

The document said the stock sale will essentially provide working capital while Asia Pulp & Paper takes other steps to simultaneously pare borrowings.

For instance, Asia Pulp & Paper is planning to make a partial exchange offer to investors who hold its 3.5 percent guaranteed convertible notes that mature in 2003 and its liquid yield option notes that come due in 2012. Investors could exchange some of these bonds for new notes that would mandatorily convert into ADRs in 2002.

The net effect of the exchange: converting debt into equity. That would not only reduce the company's borrowings but also build its equity base, moving the company forward in its plan to reach a debt to equity ratio of 1-to-1 by 2002. Its debt to equity ratio at Dec. 31, 1998, was 3.29-to-1, according to figures presented under Indonesian accounting principles.

In order to lower the ratio, Asia Pulp & Paper also said in the SEC filing that it will use cash raised from sales of non- core assets to reduce debt. For instance, the company is negotiating to sell power generating assets at mills in Suzhou and Dagang, China, to AES Corp., the filing said.

"We are also exploring a divestiture or other strategic transactions involving our packaging and tissue operations," the filing said. "However, we cannot assure you that any of these transactions will be completed."

The company's packaging operations provided about 32 percent of net sales and 17 percent of income from operations last year. Packaging and tissue are identified in the SEC filing as non-core assets, while printing and writing paper are cited as core businesses.

The stock sale will provide about $300 million for working capital. Asia Pulp & Paper's working capital requirements are increasing, the filing said, because it is starting up additional capacity and is providing longer credit terms to increase export sales, particularly in Europe and North America.

Asia Pulp & Paper plans to use most of the stock proceeds to start up new paper facilities in China. The company expects to complete projects this year that will boost its annual paper production capacity in China by about 1.27 million tons to 1.33 million tons. The Chinese plants will add to the company's primary manufacturing capacity in Indonesia.