Punters buy APP bonds ahead of debt workout
Punters buy APP bonds ahead of debt workout
Sabyasachi Mitra, Reuters, Hong Kong
Investors eying a potential windfall are snapping up the junk bonds of beleaguered Indonesian company Asia Pulp and Paper, hoping that the unveiling of a long awaited debt workout will prove worth a punt.
Some US$12.2 billion worth of bonds issued by APP, one of the world's biggest emerging market borrowers, saw prices plunge to a few cents on the dollar after the company stopped payment of interest and principal to preserve cash in March this year.
But the battered APP paper has perked up since September, with some bonds doubling in value after the group promised to unveil a draft debt overhaul plan by end of January 2002, despite the resignation of its auditor Arthur Andersen.
"The interest is because the dollar price is dirt cheap right now. There are some investors punting, looking for cheap dollar entry," said a fixed income analyst at a European investment bank, which focuses on high-yield bonds.
APP China Group bonds due 2010 are currently quoted at a mid- price of 14 cents on the U.S. dollar, up from seven cents in September and around five cents in May and June, according to high yield bond brokerage, DebtTraders.
DebtTraders quoted APP International Finance 2005 bonds at 27 cents on the dollar against about 11 cents during May and June.
"I think what is happening is that purchases of the holding company and operating company papers are being done in anticipation of restructuring announcement and what the profile might look after," Robert Appleby, director at ADM Capital, a fund specializing in impaired Asian assets, told Reuters.
Some market sources speculate that APP's controlling Widjaja family may be quietly buying back debt, which now trades at a tiny fraction of par value, ahead of the restructuring.
A bond buyback would help APP reduce its total borrowings and allow the family to protect and even boost its controlling stake in the event of a debt to equity swap -- an option favored by many of Asia's troubled family-controlled corporates.
Traders say it's difficult to trace who's buying the bonds, but a spokesman for APP told Reuters he was not aware of any plans by the company -- downgraded to Ca from Caa3 last month by Moody's Investors Service -- to buy back debt.
Headquartered in Singapore, APP has manufacturing facilities and subsidiaries in Indonesia, China and India.
It is the largest pulp and paper company in Asia outside Japan, has pulp capacity of 2.3 million tons and paper and packaging capacity of 5.7 million tons.
Vulture fund speculators hope that they have bought cheaply enough for a debt workout to give them a substantial pay-off, even if long term bond holders are forced to take a huge discount -- or hair cut -- to the par value of their investments.
At 30 cents on the dollar, for example, a speculator who bought at 10 cents would triple his investment while investors who bought at par would get less than a third back.