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Following a meeting in

  • Stockholm recently of the nine export credit agencies involved in the restructuring of the Indonesian debts of Asia Pulp and Paper (APP), the creditors have presented APP with a new set of proposals.

    The new proposals address APP’s concerns with the default mechanism in the restructuring agreement proposed by the creditors. The proposals underline the commitment of the creditors in securing a commercially reasonable restructuring agreement that meets the needs of the company and that also responds fairly and effectively to creditor concerns.

    Ibra and the ECAs have found common ground and have agreed that the restructuring would allow APP to repay its loans, and do so while having sufficient funds to meet its obligations to the communities that depend on the company for their livelihood.

    APP is now considering the creditors” new proposal and will respond to creditors next week.

    In response to APP’s concerns about the default mechanism in the proposed agreement, Ibra and the ECAs are proposing that a creditor vote will be required. The first vote will require a 75% threshold, failing which the remedy period will be extended by 30 days. If still not cured, a second vote will be required to accelerate. The threshold will be 25%. In addition, a buffer would set aside additional funds to make up any shortfall in mandatory debt payments and reduce the risk of a second default arising from missed mandatory payments. The amount of the buffer is subject to further negotiation.

    The new proposal is in addition to a number of other protections for APP already contained in the proposal agreed by Ibra and the ECAs. These protections include conservative assumptions about how much cash flow the four APP companies in Indonesia can generate.

    Other protections for APP include a cure or remedy period, a step-down mechanism for payments in the event of economic problems, and waiver provisions.

    On the other hand, APP has proposed a default trigger only after a vote by 75% of creditors, which would in effect make it very difficult to call a default considering the huge number of APP creditors worldwide. Creditors cannot accept this proposal from APP.

    APP has referred to several other international restructuring cases (ie, Astra, Paiton Energy, and Indocement) which have been done in Indonesia which provide for majority creditors to call for the declaration of default and debt acceleration, and expressed its concern of being treated differently from other borrowers in other restructuring. The compatibility of those restructuring with this one would however still need to be observed in order to determine whether those other restructuring cited by APP can support their position. It may be arguable that such other restructuring referred to APP might have been conducted under different circumstances and different factors which may influence the way such restructuring were conducted, such as number of creditors, type of the creditors the factors of which might not make those restructuring comparable and compatible to this restructuring. There are also examples of international restructuring case with lower creditor voting thresholds such as Guandong Development Enterprises and Technology Industries Berhad.

    On the payment of the outstanding coupon amounts due to the IDR bondholders, the amount has currently reached Rp94bn. Ibra has previously proposed to APP that the amounts due may be paid from the escrow account as long as APP reinstates the funds within two-three weeks. The escrow account was, in fact, established for the benefit of all creditors under the consensual restructuring. The outstanding balance of the account has currently reached about US$220mn.

    APP has rejected the proposal because in its view the increase in mandatory debt service payment in January 2003 was to also meet the obligations to the IDR bondholders.

    Ibra and the ECAs will discuss with all the creditors whether payments can be made from the escrow account to meet the outstanding amounts due to the IDR bondholders. But the important point to note is that the escrow account was established to make payments once a consensual restructuring is achieved.

    Ibra and the ECAs remain committed to work together with APP to continue the negotiation and to progress this restructuring. Ibra and the ECAs hope that the negotiation process can be resumed in a speedy fashion.