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APP: Indonesia's failing credit litmus test
By Bill Guerin

JAKARTA - 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 units.

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.

Though the 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 groups.

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.

APP is 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.

Its 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 to China.

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.

The 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.

Despite the 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.

APP is 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.

APP's debt 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.

For more 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 initiatives.

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 in 1998.

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 Megawati Sukarnoputri.

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.

These 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 dollars.

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.

A 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.

This was 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.

Though 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 settlement.

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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Jun 13, 2003

Indonesia's investment woes
(Nov 9, '02)


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