IBRA, creditors make new APP debt restructuring proposal

Dadan Wijaksana, The Jakarta Post, Jakarta

The Indonesian Bank Restructuring Agency (IBRA) and foreign institutional creditors of Asia Pulp & Paper Co. Ltd. (APP) have made a new proposal to end the deadlock in the restructuring of APP's US$6.7 billion in debts.

IBRA said it had reached an agreement with Export Credit Agency (ECA), which represents the foreign institutional creditors, on a mechanism to discourage APP from defaulting again on its debts.

"APP is now considering the new proposal and will respond to it next week," IBRA said in a press release issued on Wednesday.

The debts are owed by APP's four local pulp and paper units -- PT Indah Kiat Pulp & Paper, PT Tjiwi Kimia, PT Pindodeli Pulp & Paper and PT Lontar Papirus Pulp & Paper Industries.

Two years ago, the Singapore-based APP defaulted on $13.9 billion in debts, one of the world's largest defaults in the history of emerging markets. The debts include those owed by APP's China units.

The new mechanism was drafted after ECA rejected APP's proposal that a default could only be declared if 75 percent of the creditors agreed.

Under the new proposal, if the creditors fail to obtain 75 percent support for default, they can take a second vote within 30 days with a threshold of only 25 percent.

ECA argued that the APP proposal was not feasible given the fact that the company's creditors -- which comprise hundreds of banks, bondholders, export credit agencies and others -- are spread across the world.

The new proposal highlights the latest standoff between APP and its creditors in the high profile debt restructuring talks.

In December last year, IBRA and APP drafted the outline for a debt rescheduling deal, under which the four APP units would have repaid $1.2 billion of the $6.7 billion they owed over the next 10 years, with the remainder of the debt to be refinanced or exchanged for convertible bonds.

But the creditors rejected the plan, saying it encouraged APP to default again on its debts since no penalties were in place in the event of a default.

APP owes ECA, which includes export credit agencies from Europe, the U.S. and Japan, some $960 million collectively.

IBRA is APP's single largest creditor with total debts of $1 billion. The agency took over the debts from troubled local banks in the wake of the late 1990s financial crisis.

The difficulties faced by the foreign creditors in reaching a restructuring deal prompted some of them to lobby top government officials to persuade President Megawati Soekarnoputri to intervene in the restructuring process.

Dow Jones quoted diplomats as saying that German Chancellor Gerhard Schroeder -- who met with Megawati on Wednesday -- raised the issue in their discussions, although no details were available.

But it did say that creditors wanted to make sure APP faced penalties if it failed to keep to the terms of a restructuring deal. Fears are that the country's weak laws could mean that creditors will not be able to declare the company bankrupt.

Dow Jones also reported that the company had so far paid $220 million into an escrow account.

The account, collected from the units' operational cash flows, was established at the request of creditors to ensure repayment to creditors once a debt deal was worked out.