Asia Pulp unit shares slump on over $10b debt concern

Asia Pulp unit shares slump on over $10b debt concern

SINGAPORE (Bloomberg): Shares of Asia Pulp & Paper Co. and its
units dropped, some to a record, after analysts cut investment
ratings on worries about the group's ability to repay more than
US$10 billion debt.

American depositary receipts of Asia Pulp, Asia's largest
paper maker outside Japan, plunged 4.4 percent to a record $1.375
Tuesday in New York.

Shares of PT Indah Kiat Pulp & Paper Tbk, the most profitable
APP unit, fell as much as 1.3 percent to a 33-month low of Rp
1,105 in Jakarta on Wednesday.

Indah Kiat had its stock rating cut by Morgan Stanley Dean
Witter Inc., which said falling pulp prices and rising borrowing
costs would reduce investor returns.

The cut follows reductions by two other brokerages in the last
two weeks on concern APP may use its units' profits to avoid
defaulting on $2 billion repayments due next year.

"Indah Kiat is APP group's cash cow," said Nilesh Bhatt, an
analyst at PT Rashid Hussain Securities in Jakarta that cut its
rating on the company to "market performer" from "outperformer"
in August.

"The fear is APP will milk Indah Kiat to meet its debt
repayments. We don't think APP can repay its loans from its
current cash flow."

APP's American depositary receipts have plunged 83 percent
this year. The company sold the receipts at $11.50 at its initial
public offering in 1995, arranged by Morgan Stanley.

Morgan Stanley analysts Charles Spencer and Stanley Ling cut
the rating of the unit of Asia Pulp & Paper Co. to "outperform"
from "strong buy." The stock has dropped 60 percent since the
bank posted the strong buy recommendation on July 22, 1999.

Asia Pulp last month unveiled a plan asking investors to
exchange or adjust terms on more than $2 billion of bonds
offering them a mix of cash and new debt that pay a higher
interest. In July, APP borrowed $100 million paying 25 percent
interest to avoid defaulting on an earlier loan. That sale was
arranged by J.P. Morgan & Co.

Worse, the price of Indonesian pulp, the main source of
revenue for Indah Kiat, has fallen by 7 percent from a high of
$690 a ton in July, said Morgan Stanley.

"We're not comfortable with the company's growing levels of
debt," said Steven Lim, a fund manager at Daiwa SB Investments
(Singapore) Ltd., who helps manage $1 billion in assets.

Lim has been selling his holdings in Indah Kiat since the
Asian financial crisis and sold the last shares three months ago.

APP "has to come to some kind of arrangement to repay their
debt. They can get out of trouble if they can sell some assets
even if they have to sell at a fire-sale price -- they have no
choice. It's better to sell yourself than have it sold by the
liquidator."

Johannes Salim at PT HSBC Securities Indonesia and Masya Spek
at G.K. Goh Stockbrokers, in the past two weeks recommended
investors "sell" Indah Kiat shares. Salim cut his rating from
"underperform."

Still, "buy" or "outperform" ratings outweigh "sell", "hold"'
or "underperform" rating on the stock by 17 to 12, according to
the 29 brokerages surveyed.

That's even though Indah Kiat shares have fallen 60 percent so
far this year, under-performing the benchmark Jakarta Stock
Exchange Composite Index which has declined 39 percent.

"Why invest in a company which has destroyed shareholder value
while you can find other companies in Indonesia which have built
value for shareholders," said Salim, who cut his rating to "sell"
on Oct. 2. "The company has never made an economic profit," or a
profit from its cost of capital, he said.

Salim is worried APP may dip into Indah Kiat's cash to pay its
debt. The group as a whole and its units run the risk of a debt
default if APP is unable to get investors to agree to its debt
rescheduling plan, he said.