Asia Pulp & Paper: a balanced balance sheet?

Asia Pulp & Paper Company Limited was a multi-billion paper manufacturer with mills across
Asia and with considerable operations in the Chinese market. It primarily operated in Indonesia but was
headquartered in Singapore. The company had shareholders in the UK, USA, China, France, Germany,
Japan, The Netherlands, Singapore, and Switzerland, but its largest shareholder was the conglomerate
SMG under the Widjaja Family.

During the Asian financial crisis, the much-respected corporation substantially fell in value that
eventually led to its default of $13B in debt.

The company was controversial in its acts of altering the results of its actions in their financial
statements and not reporting the true amount of losses that they incurred. It was sued multiple times by
its creditors and shareholders, which in effect significantly destroyed its reputation.

What was the root of its breakdown? And what are the alternatives that could be taken to
combat the pressing issues that it was facing and to pull the company back up gradually?

Viewpoint

The paper will adopt the point of view of the Asia Pulp & Paper Board of Directors who is
primarily responsible for the identification and evaluation of risks, the oversight of the implementation
of rules and regulations, and the formulation of overall corporate strategy.

The Board of Directors perspective was chosen and not of its management, considering how it is
the board who undertakes major decisions as representatives of the shareholders. The managers are
then expected to implement the decisions and the plan conceived by the board.

Also, the scope of this problem is too large, involving the overall condition of the company,
larger than the range of management.

Statement of the Problem

During the onset of the Asian financial crisis, although many Indonesian corporations had large
borrowings to US companies, they initially have not experienced problems due to the increase in the
value of Rupiah which has reduced their debt. However, in August 1997, the currency substantially
declined, which gradually led to many defaults. From 2000 Rupiah to US$1 to over 18,000 Rupiah to the
US $1, this was the turning point of many Indonesian corporations.

We believe that the primary cause of the billion-dollar default of the Asia Pulp & Paper was our
aggressive approach in financing our working capital and long term obligation which lead us to these
problems;

1. How should the company reschedule its debt to solve issues to meet interest payments of long term
debt and sustain its working capital?
2. What financing approach must be taken then?

Aside from their financing, the company has also faced several corporate responsibility issues
concerning its operations dependent upon the extensive deforestation that leads us to this question;

3. What policies should the company formulate to ensure that its activities promote the sustainability of
natural resources?

Areas of Consideration

1. The root of the company’s problem was mismanagement in leveraging its operations and its existing
debts. It should be noted that its growth mainly came from leverage, and when the Asian financial crisis
transpired, the value of its debt more than tripled.

Although they were seeking funding from the capital market, not from the money market, their
approach could still be conceived as “aggressive” since they pay interest payments and maturing long
term debts from funds through another debt.

What worsened this was when the Asian Pulp & Paper altered their financial statements, reporting
significantly less than the amount of loss that they incurred, to maintain the confidence of its investors
and creditors.

They borrowed more by issuing high yield bonds which attracted many investors. They did this until the
company came to a point where it could not pay any more for interest and coupon payments since its
operations could not yield profits.

It defaulted on $13.9B of debt, making it almost impossible to seek additional funds in the capital
market. Is hope still there for Asia Pulp & Paper? Yes and rescheduling of debts and shifting to a less
aggressive financing approach will rescue the company.

2. One of the social corporate responsibility of the company was violated due to its large consumption
of woods in relation to the nature of the company that led them to operate extensive deforestation
wherein indigenous people were mainly affected because of the lack of proper agreement between the
two parties. Thus, this conflict affected the company's responsibility as they were expected to be liable
in using the natural resources efficiently.

3. The lack of accuracy in disclosing full reports was violated and neglected in accordance with "The
Company Law" or Law no. 1 of 1995 promulgated in March 1995. This law clearly stated that a limited
liability company not a listed one should have at least two shareholders where one could own up to
99.99% of the issued shares. Moreover, this requires the directors and commissioners to submit
financial statements to shareholders but the company did not accurately followed the law which made
them the primary responsible of the consequences experienced by the investors.
4. Financial Depression regarding debts and bankcruptcy in Indonesia was mainly due to the fact of
shattered currencies, stock markets, prices of assets in several countries in Asia during early 1997. Evern
though Indonesia had low inflation, described with a trade surplus of more than US$900m, foreign
exchange reserves of over US&20bn, and a good banking sector, the value of the country's currency was
turned severely depreciated in August (same year) with downturn of 13.5% of the country's Gross
Domestic Product.

5. Additional to the lack of accuracy and full disclosure issue of the company, another reason was the
false identification of assigned auditors stated in the audit reports which led to confusion when the real
ones were some local indonesian auditors instead of what was disclosed. Moreover, this issue was
followed by the failure of the inclusion of reports due to its expected negative impact to the creditord
such as the loss of two currency swap contracts, listed questionable transaction and accounting entries,
US$1.56bn in provision for doubtful debts, reclassification of receivables, and US$67.2m derivative
loans.

ALTERNATIVE COURSES OF ACTION.

1. The proposal of the chief financial officer should be applied to the company since its intention is for
the sake of the company itself. Wherein the proposal is to make a structure in which the family would
remain in control of the operations only and independent parties are for the sales, marketing, and cash
disbursements. This would mean that "Family Structure" should be changed fair enough with the
recognition of other skilled, knowledgeable unrelated parties of Widjaja Family. Due to the shortcomings
of some family members dealing with the complexity of the business wherein they were given
undeniable exclusive rights which were deemed unnecessary that led the company's ineffective
operation. That is why CFO must pursue his/her plan of outsourcing independent parties as a better
alternative of managing the company.

Alternative Courses of Action

New structure for the treatment of finances

1. The company should reinvest profits if there is any instead of declaring dividends in a span of at least
two years to 3 years and it must honestly disclose its current financial position with its shareholders to
maintain trust in the business.

Since the company’s stock value is so low that it reached to .12, risks of investors selling their current
holdings of Asia Pulp & Paper shares is less as they could not get any profit out from it or will not save
them from any more losses considering that the company is already at its lowest point.

2. Reschedule and negotiate well with currently maturing debts with banks. If properly executed, this
will help defer payment of $3.5B of debt, and the period of 8 to 10 years will give them sufficient time to
fulfill their obligation.

3. Liabilities from bonds account the highest at 38%. The company should maintain succumbing to the
demand of investors, that is increased yield in exchange for its risks. The $3.5B deferred for settlement
to the banks could be used to fund the bond coupon payments for this additional bond issuance.

Area of Consideration:
The defunct auditor, Arthur Andersen indicated that they were not the auditors of the subsidiaries of
APP but the local Indonesian auditors which mainly is the reason why in the 1999 company audit report,
it provided a clean bill of health for the company. However, a report in 2001 announced that it had
failed to include US $220m loss in their financial statements for 1997-1999.

Alternative Course of Action:

APP Auditors of the company's financial statements should not be the company's local Indonesian
auditors to avoid conflict of interest and to really state the truth about the company's financial status to
avoid misrepresentation and maintain integrity in reporting.

Objective:
Asia Pulp and Paper Company Ltd. had become one of the world's leading pulp and paper companies. It
ranked second next to Japan. Because of its aggressive approach to access large loans and natural
resources in Indonesian capital market, it overwhelmed the company leading to the company's
insolvency. A lot of complaints from creditors were filed against the company. This study aims to
understand the origin of its insolvency and to provide solutions to bring back the company's ability to
pay its creditors and to contribute appropriate actions on how the company should run the business in
the most legal way.