Indonesia Supreme Court Overturns Asia Pulp & Paper Debt Ruling

By Arijit Ghosh and Bambang Dwi Djanuarto

Nov. 1 (Bloomberg) -- Indonesia's Supreme Court validated $500 million of bonds sold by a unit of Asia Pulp & Paper Co., reversing its decision of two years ago and ruling in favor of creditor banks including Morgan Stanley.

There was ``something wrong with that verdict,'' Djoko Sarwoko, vice head of supervision at the court, said in a mobile- phone text message yesterday, disclosing that the Supreme Court overturned its earlier ruling Oct. 19 in a so-called Civil Review.

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The decision may attract overseas investors to the nation's corporate debt as it ratifies sales of foreign-currency bonds by overseas units set up by Indonesian companies such as Asia Pulp's PT Indah Kiat Pulp & Paper Corp.

Indah Kiat had won previous rulings that invalidated the bonds, absolving the company of having to pay the debt.

The ruling ``is positive for all Indonesian companies looking to access capital markets,'' Robert Rauch, a director at Gramercy Advisors LLC, one of Asia Pulp's creditors, said in an e-mailed response to questions. ``We are hopeful that this definitive ruling clears the way for there to be a reasonable and appropriate resolution with secured bondholders.''

Indah Kiat had claimed in 2004 the sale of $500 million in bonds was a ``deceptive scheme'' by Morgan Stanley, the underwriter, and others to generate fees, according to a statement at the time from Gramercy and Oaktree Capital Management LLC, another creditor.

Gandi Sulistiyanto Soeherman, vice chairman of Asia Pulp's debt-revamp panel, didn't immediately respond to a text message sent to his mobile phones. Agustian Partawijaya, a spokesman for Asia Pulp's parent, Sinar Mas Group, hadn't seen the ruling and couldn't comment.

Payments Frozen

Asia Pulp's controlling Widjaja family has been wrangling with creditors since freezing payments on a record $14 billion of debt in 2001.

Creditors including Gramercy had appealed the June 2006 Supreme Court ruling that upheld a lower court's decision to invalidate the $500 million of Indah Kiat bonds.

Indonesian companies such as state power producer PT Perusahaan Listrik have used overseas companies similar to the one set up by Indah Kiat to sell bonds overseas. Companies from the Southeast Asian nation raised about $2.5 billion of debt overseas last year, according to Bloomberg data, as credit rating upgrades reduced borrowing costs.

Legal Uncertainty

Overseas companies have complained about the lack of legal certainty and creditor rights in Indonesia. A Jakarta court declared Prudential Plc's Indonesian unit, PT Prudential Life Assurance, bankrupt in April 2004, with the Supreme Court overturning the verdict in June. In 2002, Manulife Financial Corp.'s Indonesian unit was declared bankrupt by a court, a decision that was also later overturned.

Companies can file a Civil Review after the discovery of new evidence or if it can be proved that a judge made an error.

A group of creditors that provided unsecured loans to Indah Kiat and two other Indonesian units of Asia Pulp agreed to restructure the debt in 2004. Several others, secured creditors including U.S. Export-Import Bank and hedge funds Gramercy and Oaktree, sued.

Asia Pulp resumed payments to overseas creditors, including JPMorgan Chase & Co. and Goldman Sachs Group Inc., in April 2005. Oaktree agreed to be part of the deal earlier this year.

Under the agreement, Asia Pulp will repay creditors about $4.2 billion over 13 years and a further $2.5 billion in 18 to 22 years. About $6 billion of the debt is effectively included in the agreement because creditors holding only 93 percent of debt endorsed the final plan.

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net; Bambang Dwi Djanuarto in Jakarta at bbjakarta@bloomberg.net.

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