|APP: Indonesia's failing credit litmus
By Bill Guerin
New York-listed and Indonesian-controlled Asia Pulp
& Paper, saddled with debts of US$13.9 billion, has
apparently yielded to two years of pressure from some of
its largest creditors. It was announced this week that
APP has agreed to a proposal to restructure $6.7 billion
of debt owed by its Indonesian operating
The deal covers the four Indonesian units
only, including two publicly listed pulp and paper
companies, Tjiwi Kimia and PT Indah Kiat Pulp &
Paper. The amount is just under half of Singapore-based
APP's total outstanding debts - a massive $13.9 billion.
This total includes debt owed by APP's Singapore
holding company itself and entities in China that were
not part of the recent negotiations.
deal is expected to come into effect next month, it is
not certain whether it will fly with hundreds of other
creditors who have remained outside a repetitive circle
of talks between APP and its two largest creditor
These are APP's largest creditor, the
Indonesian Bank Restructuring Agency (IBRA), which is
owed $1.2 billion, and representatives of export credit
agencies (ECAs) from Europe, Canada, the United States
and Japan, which are owed a combined $1 billion. The
ECAs manage export credit finance and insurance on
behalf of their respective governments.
one of the world's largest pulp and paper groups, has 17
manufacturing facilities in Indonesia, China and India,
and sells to more than 65 countries.
expansion to China, India and Malaysia had been funded
by 10-year bonds (1990 to 1999), that cost US$12
billion, the biggest slice being used for the expansion
Several investment and commercial
banks acted as fund managers in the issuing of the bonds
and arranging international debt syndication. These
included Franklin Templeton Investment and the Capital
Group from the US as well as several well-known
investment banks such as Merrill Lynch, Morgan Stanley
Dean Witter, Goldman Sachs, ING Barings, Credit Suisse
First Boston, UBS Warburg and Deutsche Morgan Grenfell.
Among the commercial banks involved in arranging
syndication were ABN Amro Bank, Barclays Bank, Bank of
America, Dresdner Kleinworth Benson, Fuji Bank,
Development Bank of Singapore, ING Bank, Bank of China,
Credit Lyonnais and Deutsche Bank.
When pulp and
paper prices fell the bubble seemed in danger of
bursting. APP, rather than sell assets to pay its debts,
issued new bonds. As creditors confidence evaporated and
the shares nose dived, it was only a matter of time
until the New York Stock Exchange delisted APP after the
share price dropped below $1 per share.
conglomerate then agreed to begin a complex series of
asset disposals and restructuring of debts and
obligations after calling a halt to all payments of
interest and principal to its creditors in March 2001.
Hundreds of creditors had laid siege to APP's offices in
Singapore, Hong Kong and New York.
debt moratorium, APP maintained interest payments to
local bondholders, sparking sharp criticism from foreign
creditors demanding that all creditors should receive
equal treatment. They feared the Indonesian government,
one of APP's largest creditors, would be given priority
under any debt-restructuring deal.
controlled by Indonesia's Sinar Mas Group, which owes
some Rp13 trillion to IBRA. IBRA took over the loans
from Bank Internasional Indonesia (BII), which is also
partly owned by the Sinar Mas Group.
restructuring, among the largest attempted in Asia, was
always going to be a complex operation given that assets
are spread across the region and creditors spread across
the globe. After APP met with its creditors in order to
discuss how its debts could be paid the creditors set up
their own supervisory committee to monitor APP's efforts
to finalize debt repayment proposals.
than two years APP toyed with these creditors,
particularly the ECAs, exposing the lack of common
ground between the bigger lender groups and the
countless and diverse smaller creditors. APP gave little
away as meeting after meeting saw armies of financial
advisers and lawyers representing the creditors match
wits against a similar army from the APP team.
IBRA is responsible to the Financial Sector
Policy Committee (FSPC), chaired by the coordinating
minister for economic affairs, Dorodjatun
Kuntjoro-Jakti. Eventually, after protracted meetings
had led nowhere the FSPC last June 15 endorsed a
memorandum of understanding (MoU) signed by IBRA and the
ECAs of Germany, Japan and the United States on behalf
of all the ECAs.
IBRA was tasked with leading
the restructuring process and supporting creditor
The view of the ECAs is that
restructuring APP, though a commercial transaction, is
in essence a government-to-government issue and IBRA, an
agency of the Indonesian government, is one of APP's
largest creditors. The partnership of these government
creditors, the key aim of the MoU, was seen by the
non-Indonesian side as better able to deliver a final
restructuring agreement that would benefit all
creditors, including IBRA, make commercial sense and
last, but by no means least, be financially sustainable.
Unfortunately IBRA, due to be disbanded this
September, was the weak link in the chain. Though a
leader in the restructuring negotiations Syafruddin
Temenggung, the IBRA chairman, was seen as being too
supportive of APP and the agency's credibility in any
case is lower than it has ever been since being set up
Finally this March the ambassadors of
the 11 countries involved, Austria, Canada, Denmark,
Finland, France, Germany, Italy, Japan, Spain, Sweden
and the United States, sent a letter to President
Though some Indonesian
circles slammed the move as intervention in Indonesian
sovereignty over its economic policymaking, in reality
it was simply an appeal to common sense, and geared to
seek Jakarta's support for ECA proposals for adequate
control mechanisms and incentives.
countries have lent billions of dollars to Indonesia and
are likely to do so in the future. IBRA, though not
criticized in the letter, had not performed as expected.
The ECAs from the outset have pressed Jakarta to
see a fair and proper settlement as a boost to the image
and international relationships of the country. As well
as this it would benefit all creditors, including IBRA,
by increasing recoveries by hundreds of millions of
They pointed out also that Jakarta will
look to the ECAs to assist in underwriting the finance
needed for infrastructure projects in the years to come
and that future decisions would depend on their
evaluation of whether these loans would be repaid.
In other words the issue was of sovereign risk
and guarantee. Hence the appeal to Megawati to see that
her ministers exercised close supervision over IBRA to
ensure a fair, commercially reasonable and transparent
restructuring of APP.
Kompas, a mainstream daily
newspaper, leaked the gist of the letter, sparking
immediate controversy over whether or not Indonesia
should kowtow yet again to foreign pressure.
statement in the ambassadors' letter that suggested
supporting the APP restructuring would be a key test of
the Megawati administration's commitment to attracting
investment was slammed as insensitive.
taking place against a backdrop of strong and sustained
political pressure in parliament for Indonesia to
withdraw from the International Monetary Fund (IMF).
Television debates and stances taken in certain
elements of the media drew comparisons with last year's
direct appeal by the Canadian government over the
Manulife case, the US pressure to resolve the giant
Paiton power restructuring deal and even Tokyo's
sustained political lobbying two years ago to resolve
the Chandra Asri deal with Marubeni.
Megawati, characteristically, made no public statement
in response, during March and April, meetings between
the ambassadors, IBRA, and a handful of government
ministers were held to attempt to resolve outstanding
and thorny legal issues that stood in the way of a final
This suggests that wisdom triumphed
over the nationalism shown by key figures inside and
outside the government.
Transparency and good
governance have been the stated aims of the Megawati
government from the outset. Though political pragmatism
may have had a lot to do with behind the scenes pressure
on IBRA to do its job properly, the deal gives cause for
optimism that at the end of the day Indonesia's leaders
know they cannot jettison key international
relationships over what is essentially a Widjaya family
owned business playing hard to get with its creditors.
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