2001: Counting the cost

Having retained access to the capital markets throughout the crisis, Asia Pulp and Paper eventually threw in the towel in March 2001, calling a standstill on a staggering US$12bn of debt in the world’s biggest corporate emerging market default. APP’s move triggered fraught scenes as onshore and offshore creditors battled to enforce their rights, at one point marching into the offices of a subsidiary with a list of demands.

Things didn’t get much better in the second half of the year, as Asian markets were knocked by Argentina’s debt troubles and the collapse of US energy company Enron. Australia and Japan, however, remained open for business, and Thailand made it back to the global market with a sovereign Samurai.

IFR Asia 203 – April 14, 2001

APP fails to win confidence

Asia Pulp and Paper (APP) last week met with its creditors in an effort to gain support for its debt standstill, but with the company revealing it had greater than previously reported debt and its officials sidestepping difficult questions, creditors remain unsympathetic. Though they are suspicious of APP and its controlling shareholders, the Widyaya family, most creditors appear wary of taking the company into receivership. However, a growing number might take independent legal action to recover their debt.

At the meeting, APP revealed that its consolidated debts totalled US$12.2bn, about US$1bn larger than figures given in its June 2000 financial statement and exclusive of US$3.9bn in contingent liabilities which arise from guarantees on subsidiary operating companies. The US$12.2bn number also excludes US$586m in preferential shares and US$300m in accrued interest.

APP also gave a dark picture of its cashflows, stating that Ebitda at its Indonesian operating subsidiaries as a whole was US$50m per month, well below previously stated numbers. Indah Kiat, the strongest of APP’s subsidiaries for example, posted an Ebitda of US$960m in 2000.

APP also offered no explanation as to the status of the large cash balances it once proudly pointed to when seeking to allay investor concerns over its large debt load.

“There was zero disclosure on what happens to cash. They would have us believe that it is locked up for crucial working capital needs,” said one creditor.

Given the poor recovery prospects and the likelihood of a long negotiation period, a number of creditors said they were considering independent legal action in Singapore’s courts. They noted APP has yet to win a consent from all creditors for a debt standstill and that in the absence of APP seeking Chapter 11-type protection, the window was still open for those creditors looking to recover their debts through the Singapore tribunal.

IFR Asia 233 – November 10, 2001

APP creditors read the riot act

Rupiah bondholders entered the Jakarta offices of APP subsidiary Pabrik Kertas Tjiwi Kimia unannounced on Friday last week to deliver an ultimatum: either pay the Rp200bn (US$19.2m) principal due on the bonds or face separate but simultaneous litigation in the country’s bankruptcy, commercial and criminal courts.

The showdown came after Tjiwi Kimia had proposed to bondholders that they delay taking any legal action against it until the company came up with a restructuring plan for the rupiah bond in February 2002. In the interim Tjiwi Kimia would issue to the bondholders interest bearing promissory notes to replace coupons that had expired at the bonds’ maturity. Though Tjiwi Kimia did not redeem the principal due on the bonds on November 8, it did make the Rp8.7bn final coupon payment for the issue and suggested it would pay the principal in February.

Bondholders responded by striding into Tjiwi Kima director Gunawan Taslim’s office. They added that if payment for the bond was not made within the 14-day grace period allotted by the documentation for the bond, the investors would commence legal action. The bondholders added they would press criminal charges against the company for fraud and embezzlement. About 30 bondholders, mostly mutual and pension fund managers, were in that meeting with Taslim, according to one of the steering committee members.

In their meeting with Taslim, pension fund managers reminded the director that holders of pension policies were ordinary people who are increasingly nervous about their financial future. Many are ordinary factory workers who might be infuriated should news leak that APP group subsidiary’s failure to fulfil debt obligations had made a significantly negative impact on their pension funds.

Taslim was visibly shaken by these comments, creditors that attended the meeting said. Later the fund managers received word that henceforth, the company would only communicate with bondholders via their lawyers and advisers.

IFR Asia 238 – December 15, 2001

Thai Samurai slices through Enron and Argentina concerns

The Kingdom of Thailand went ahead with its ¥35bn (US$276m) three-tranche Samurai deal last week, despite what many saw as unfavourable timing. The deal, which was led by Nikko Salomon Smith Barney and Daiwa SMBC Securities, was launched into a market still concerned about Enron’s bankruptcy, Argentina’s troubles and Japan’s recent sovereign downgrades.

While Household Finance of the US and Germany’s Volkswagen chose to put off their planned Samurais until next year, Thailand pressed ahead. “We were aware of the current market situation, but we are certain that Thailand’s special relationship with Japan would allow Japanese investors to feel safe in purchasing our bonds,” said Sommai Phasee, deputy permanent secretary of Thailand’s Ministry of Finance. Referring to the fact that the proceeds will be used to refinance maturing debt for Thai Airways, Sommai added that Thailand had little choice about timing.

If pricing is any guide, the decision to press on was correct, as the deal achieved aggressive terms. The ¥35bn was split into three tranches. The ¥9bn three-year piece priced at 55bp over yen Libor, the ¥13bn of five-years priced at 65bp over and the ¥13bn chunk of seven-years priced at 90bps over. Proceeds will be kept in fixed-rate yen.

Some syndicate officials who deemed the bonds too expensive cited South Korea as a reference. Thailand is rated one notch below Korea at Baa3/BBB- (Moody’s/S&P).

Nikko SSB officials said the deal was completed successfully “ We realise that the offering was priced tighter than secondary prices for bonds such as Korea or even Thailand in US dollars. However, it is clear that Japanese investors have a positive view on Thailand, given that our allotment has been fully sold,” said a banker at Nikko SSB.

The deal was Thailand’s first public offering since the 1997 Asian currency crisis and its first time back in the Samurai market since December 1996.