Asian giant at crisis point

APP's Indonesian factories are vulnerable to unrest

Crunch time is approaching for Asia Pulp & Paper, one of the region's largest companies.

It has between $1.5bn and $2bn worth of debt to pay back this year - and it has already made one late payment and missed another.

The company owes between $10bn and $11bn, mostly to US investors, who are now worrying about the implications of a major default.

Fear exists that if the company - one of the world's largest paper companies - fails to sort out its debt problems, it could create fresh economic problems for the region.

Speculation is growing that it may have to restructure its debt with investors.

"Investors, suppliers and bankers are getting nervous about this company's ability to make payments on their debt," Ee-Lin Tan, an analyst at Standard and Poor's, the US rating agency said.

Share weakness

Already its share and bond prices have fallen.

Its shares - listed on the New York Stock Exchange since 1995 - hit a low of $0.17 in February, compared with a high of $7.43 on 20 March last year.

This weakness has not directly hit stock market indexes, but could also indirectly send further shudders through Asia's shares indices as investors become more nervous about lending money to other companies in the region.

APP's share price has plunged to record lows

Asia Pulp & Paper has always been a heavy borrower, paying high interest rates to investors who felt the returns compensated for the risk.

Many companies in the region built up heavy debts, which ultimately proved to be their downfall when investors deserted the region during the crisis in 1997 and 1998.

The paper giant was one of the few that emerged largely unscathed from that crisis, helped by the fact that its debt was longer-term.

"It was able to generate sales in US dollars [to pay its debts] when Indonesian and Asian companies were having a tough time making sales," said Ee-Lin Tan, analyst at rating agency Standard and Poor.

Now, the time is nearing for this debt to be repaid, and it is already having difficulty making the interest payments.

This is partly because of the falling demand for its products, but also because investors are wary of lending it more money.

"Their suppliers are actually tightening credit terms for them, they are giving them shorter credit terms for their payback period," Ee-Lin Tan said.

Legal action

Already Credit Lyonnais has filed a writ against Asia Pulp and Paper, making it clear they doubt the company will pay its debts.

Part of the problem for creditors is that while the company may have its headquarters in Singapore, most of its assets are in China or Indonesia.

The company - controlled by the Sinar Mas Group, one of Indonesia's largest conglomerates - has 17 major manufacturing facilities in Indonesia, China, Singapore and India, employing an estimated 79,000 people.

This may make if difficult for creditors to get their hands on assets in the case of a default.

Investors have also the added geographical risk - many of the company's factories are in Indonesia, which has witnessed political unrest in recent years.