Asia: The Untouchables – Indonesia's Widjajas


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Default? What default? Asia Pulp & Paper, Sinar Mas and the Widjaja family, once pariahs of the international financial markets, have bounced back with a vengeance. Are the memories of the banks financing them too short? Or are they backing a group that can deliver on both its repurposed business and environmental credentials?

Untouchables main-350
Illustrations: Britt Spencer
by Sara Webb

Indonesia’s enormous Sinar Mas group seems to be on a roll. Owned by the Widjaja family, one of the richest in the country, it is expanding in some of Jakarta’s most important, or priority, economic sectors. It has clinched eye-popping deals and borrowed billions of dollars in recent years to build the world’s biggest pulp mill as part of an ambitious expansion in southeast Asia, China and the UK.

Yet it was not that long ago that this group was considered a pariah by the international financial community. In 2001 its New York-listed crown jewel, Asia Pulp & Paper (APP), called a debt standstill on nearly $14 billion of bonds and loans. That made it the biggest default by an emerging markets corporate name – a dubious record that APP still holds to this day.

What followed was a protracted and bitter battle between APP and an assortment of international creditors, many of whom had sharply competing interests. Among those fighting to get their money back were the Indonesian Bank Restructuring Agency, which was created to save Indonesia’s banking system during the Asian financial crisis in the late 1990s, and a group of mainland Chinese banks that had lent over $1 billion to APP’s Chinese mills and which formed a separate creditor group. 

With several state-of-the-art mills located in China, APP feared these assets could be seized by the mainland banks: so it ring-fenced its Chinese operations from its Indonesian assets, kept the Chinese banks separate from its other creditors, and eventually spun off APP China in a debt-for-equity swap that gave the Widjaja family a substantial stake.

However, the vast bulk of APP’s debt was owed to a multitude of international creditors, including plenty of famous names; banks such as Deutsche Bank, ABN Amro, Credit Lyonnais and Japan’s Fuji; bond market mainstays like Fidelity Investments and John Hancock Funds; distressed-debt investors like Oaktree Capital Management and Gramercy Advisors; and government export credit agencies in the US, Japan and Europe. The big Japanese trading houses Mitsubishi Corp and Nissho Iwai Corp were also owed money. 

Negotiations over APP’s restructuring dragged on for years. 

APP was initially advised by Credit Suisse until the relationship between the investment bank’s restructuring experts and the Indonesian client (APP) soured. Credit Suisse declined to comment on its relationship with APP/Sinar Mas group companies for this article.

Some creditors such as Gramercy and Oaktree turned to the courts in the US, Singapore and Indonesia to try to secure better repayment terms, while many others complained that the final restructuring deal paid back crumbs over too long a timespan. 

What particularly riled creditors and investors at the time of the showdown, as they tried to negotiate debt repayments, was the discovery that APP and other companies in the Sinar Mas Group had carried out several highly-questionable transactions, often with related parties, that resulted in further losses of at least $1 billion. 

Yet more than a decade later, it would appear there is little institutional or corporate memory of the group’s antics.

Indeed, the Sinar Mas Group appears to be flourishing, with substantial interests in pulp and paper, palm oil, property, financial services and telecoms. It is even expanding in the energy sector, with a deal to rescue British financier Nat Rothschild from his ill-fated venture with the Bakrie family in Indonesia’s coal sector. The offer to acquire Asia Resource Minerals or ARMS, previously known as Bumi, valued the coal group at over $200 million.

As for APP itself, far from being strapped for cash, it is building the massive OKI Pulp & Paper Mills in south Sumatra, Indonesia. The sheer size of the mill, which is set to be the biggest in the world, as well as APP’s environmental track record and its financial history, has prompted questions over whether it has enough plantations to supply OKI without having to resort to further destruction of natural forests or use more expensive wood chips instead, factors that could potentially impact the group’s finances.

Several of the Widjajas’ other companies, such as Golden Agri-Resources, are again active in the capital markets. And, remarkably to those with memories of the APP fiasco, they have returned to raise funds in the markets. 

“Banks always make the same mistakes,” says one banker who was involved at the time. “I’m not surprised these guys are back in the markets.”

Raising funds

Since 2001, companies in the Sinar Mas Group have sold about $1.18 billion in shares, raised the equivalent of $2.79 billion from selling bond issues, mostly in Asian currencies, and spent $4.58 billion on M&A deals, according to data compiled by Dealogic.

This year, Sinar Mas Land spent £350 million ($530 million) on two prime properties in London, including the Alphabeta office building. Golden Agri-Resources, the Widjajas’ palm oil company that got into financial difficulty when it put the bulk of its cash deposits into a Cook Islands bank owned by the family back in 2001, said it sold S$125 million ($89 million) of three-year bonds in April 2015, appointing Credit Suisse (Singapore) Limited, Mitsubishi UFJ Securities (Singapore) Limited and Oversea-Chinese Banking Corporation Limited as joint lead managers and bookrunners. In May, Golden-Agri said it sold an additional tranche of S$75 million, led by OCBC. 

Even APP has been able to raise funds again, despite its history. Two Chinese banks, China Development Bank and ICBC, have agreed to stump up a total of $2.5 billion for the group in the past two years. In October 2013, APP’s OKI Pulp & Paper Mills signed a $1.8 billion loan with China Development Bank, witnessed by Indonesia’s president at the time, Susilo Bambang Yudhoyono, and Chinese president Xi Jinping. A year and a half later, in March 2015, Sinar Mas secured another $1.5 billion in loans from China Development Bank and ICBC Financial Leasing, half of which was earmarked for OKI. Terms of the deal were not disclosed. 

Neither China Development Bank nor ICBC responded to queries from Euromoney asking whether they had made any previous loans to APP, including debt that had to be restructured after the default in 2001; neither did they respond to questions about the terms of the loans to OKI.

Eka Tjipta Widjaja-200
Eka Tjipta Widjaja
Asked about the extent of the fund-raising activities of APP and other Sinar Mas companies, the group responded: “APP has always been growing, and this growth is made possible with the support from our government and financial institutions. This includes PT OKI Pulp & Paper Mills (OKI), which have a $1.8 billion loan transaction with China Development Bank (CDB) for the development of the mill. This agreement is backed by regular auditing and reporting to ensure the mill’s performance.”

But with its history of dubious finances and shoddy treatment of creditors, some of those who got burnt in 2001 ask how does such a group survive, let alone flourish, expand and raise money? 

“I think they have always taken care of and repaid their Chinese banks... even back 14 years ago with all the other difficulty. That’s part of the answer,” says one hedge fund manager who tracks Indonesian restructurings. 

“The broader reality is that most people in the fund management and banking world don’t have 15-year life spans. So you have new people in the markets with less of a sense of history.” 

Bankers who worked in the region in the late 1990s, during the Asian financial crisis and its aftermath, agree. “Some investment banks have had complete personnel turnover since then. The ones there now are not aware of the history, so if you want to make money, you have to underwrite things and sell them, and there are enough young people around, people with short memories, that they can do it,” says one banker familiar with the Sinar Mas Group. 

“It is highly, highly unusual to have a situation where a very large company defaulted and only paid creditors just cents in the dollar, and where the controlling shareholder and management remained in control.” In most cases like that, the ownership would have changed, this banker says. 

Tommy Tan, an investment banker who worked for big banks such as Merrill Lynch and Morgan Stanley before setting up boutique firm TC Capital, said he was not surprised to see the group’s return to the markets.

“Sinar Mas remains one of the largest groups in Indonesia, and it is not a monolithic group as there are different siblings running different businesses with different market profiles. Banks and fund managers have short institutional memories as people move on from their jobs,” Tan says.

“Restructuring means that a business can get back on its feet. So the question is not whether they would be able to tap the markets again but rather when they can return to it. I’m sure the banks are more careful about structure now to get better security,” Tan adds.


So how did the Widjajas rise to such a prominent position in Indonesia, China and Singapore?

Like many of the overseas Chinese whose businesses dominate Asia’s economies, Eka Tjipta Widjaja is from Fujian province in China. Born around 1922 or 1923, he came to Sulawesi as a child and set up his first small trading business in the late 1930s, hawking biscuits and sweets from a pedicab. He later got into trading coconut oil and when General Suharto seized power in a coup in 1966 and introduced pro-business policies, he expanded in the paper and palm oil businesses. 

As his companies prospered, he took on the trappings of wealth. He famously boasted of owning a belt with a buckle encrusted in diamonds spelling out his name, EKA. He kept numerous wives and mistresses, and has dozens of children and grandchildren. 

While APP’s creditors were holding heated discussions and wrangling with the Widjajas in Singapore and Jakarta over the billions of dollars they were owed, the 80-year-old Eka was suing one of his mistresses, a 26-year-old Indonesian student called Fifi, in Singapore for the repayment of S$700,000. According to the court records, Eka lent Fifi the money so that she could buy a condo in Singapore where they could meet “more discreetly”.

Many of Eka’s children by his first wife, who are now in their 60s and 70s, work in the family business. Teguh Ganda Widjaja was in charge of APP, while Teguh’s brother Franky ran Golden-Agri, and another brother Indra ran the group’s banking operations. 

Now the next generation, the grandchildren, are rising through the ranks. Teguh remains chairman of APP while his daughter Linda Widjaja is the managing director. Eka’s grandson Fuganto Widjaja, who is in his 30s and was educated in Singapore and the US, worked as an analyst at UBS before joining the family firm. Fuganto was closely involved in the ARMS deal, buying out Rothschild, and is the family’s most visible member.

Teguh was determined to make APP one of the biggest pulp and paper groups in the world, undertaking a massive expansion in China financed with billions of dollars of debt, largely driven by a savvy Indonesian banker and trusted family confidante called Hendrik Tee. APP had a great story to tell investors – its costs were extremely low, thanks to cheap timber and pulp, and it was expanding in the fast-growing Chinese market. 

APP was regarded by many of the global banks as a gold mine in the 1980s and 1990s: overall, the fees APP generated from listings, loans, bonds and share issues for banks such as Morgan Stanley, Credit Suisse, Merrill Lynch, ABN Amro, Deutsche Bank and others amounted to about $200 million. 

But the rapid expansion and huge debt eventually contributed to APP’s collapse, when it could not afford to pay its suppliers and service its debts.

Not surprisingly, it is hard to find any mention of APP’s default or dealings on its website. The group lost its prestigious New York Stock Exchange listing when its share price collapsed at the time of the default, so it is not required to make financial disclosures. Is there any reason to think that Sinar Mas has reformed? 

Reasons to be cautious

The Widjajas' financial conduct has given bankers and investors reason to be wary in the past. Yet even if the group has been rehabilitated in terms of the international financial markets, there are other reasons to be cautious.

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Fuganto Widjaja

For years, environmentalists have criticized APP and other Indonesian pulp and paper groups as well as their suppliers over practices such as the use of illegal wood sources, land use and methods of clearing, and the widespread fires, especially on peat land, that have caused months of noxious haze in the region. Such environmental concerns have implications for creditors and investors too: it is worth remembering that in the past, Greenpeace successfully lobbied investors and customers of the Sinar Mas Group, including HSBC, Nestlé and Mattel, to sever their business connections with the Indonesian group because of its forestry and palm oil policies.

APP has promised to make substantial improvements, pledging its commitment to being “fully reliant on renewable, plantation-grown fiber from socially, environmentally and legally responsible sources,” and hiring consultants and environmental experts to advise and monitor its progress.

But sticking to those promises is proving difficult and APP has received mixed reviews over its efforts. 

As haze choked Singapore, Malaysia and parts of Indonesia last year, attention focused once again on the fires burning on Indonesia’s island of Sumatra. Using the Transboundary Haze Prevention Act, Singapore’s National Environment Agency has demanded information from several companies including APP about the fires and efforts to prevent or control these, and could potentially impose fines. Some supermarkets in Singapore have even stopped selling APP products such as tissues pending the results of investigations into the cause of the haze.

When asked about this, APP said: “We understand why customers felt the need to take urgent action, and we felt the same urgent need to tackle the haze issue. However, the causes of fire are extremely complex, involving many parties, and both the Singapore and Indonesia governments and authorities need time to research and investigate the situation before making a final verdict.” 

APP said it is fully committed to transparency in the issues surrounding forest fires: “We responded quickly to the National Environment Agency notice for information and in accordance with their deadline APP went beyond that to invite NEA officials to visit its operations in Indonesia to demonstrate the company’s no burning policy.”

Some of the toughest questioning about the Sinar Mas Group is coming from environmentalists and analysts who have followed the development of OKI, APP’s new pulp mill in South Sumatra. The way APP has handled that project raises questions again about transparency. For example, even as APP was giving commitments to improving its environmental conduct, the group was planning the construction of the giant new mill OKI: yet it kept its involvement in OKI quiet until July 17, 2013, when two of APP’s subsidiaries said in a press release they had acquired a controlling stake in OKI.

“PT Pabrik Kertas Tjiwi Kimia Tbk and PT Pindo Deli Pulp and Paper Mills, part of Asia Pulp & Paper, have completed the acquisition of a 70.58% shareholding (each 35.29% shareholding) in PT OKI Pulp & Paper Mills, a company currently developing a pulp and paper mill in South Sumatra,” they said in the press release.

In its September 2012 sustainability update, APP had denied involvement with OKI, saying, “despite recent media reports, neither APP nor Sinar Mas group, has any share ownership (affiliation) with PT Bumi Persada Permai (BPP), the company reported to be developing a new pulp/tissue mill in South Sumatra”. Yet searches of public records suggest BPP has been associated with the Sinar Mas Group for several years, based on employees’ testimonials and descriptions published on LinkedIn, as well as forestry concession records.

When Euromoney asked APP and Sinar Mas about these apparent links, they responded: “The 2012 sustainability report confirmed that APP did not have any share ownership with PT OKI Pulp & Paper Mills at that time. Share ownership by PT Pabrik Kertas Tjiwi Kimia Tbk and PT Pindo Deli Pulp and Paper Mills, part of Asia Pulp & Paper Group (APP) was subsequently achieved on the 11th of July 2013.” 

Production capacity

Securities analysts who cover the global pulp and paper industry say APP’s advantage is the fact it is a low-cost producer of pulp and paper.

“The fantastic profitability is from having forest plantations as close by as possible,” says one industry analyst. If OKI were unable to meet its wood requirements from nearby plantations, he adds, it would have to find other sources, for example by importing wood chips from Australia, which would lead to higher costs.

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Teguh Widjaja

When Euromoney asked APP about OKI’s production capacity and whether or not its timber needs could be met from plantations, APP responded: “PT OKI Pulp & Paper Mills is anticipated to have an annual capacity of approximately 2 million air dry tonnes of short fibre pulp and 500,000 tonnes of tissue. There are no plans for future expansion at this stage…

“Asia Pulp & Paper Group’s Indonesian fibre supply is forecast to be sufficient to meet the fibre needs of PT OKI Pulp & Paper Mills and other pulp mills within the group. We continue to improve yields throughout the supply chain. In the unlikely event of insufficient Indonesian plantation supply, APP will use other sources and will ensure that, in line with its Forest Conservation Policy (FCP) commitments, any such sourcing supports responsible forest management.”

Still, some environmental experts are concerned.

“With OKI designed to operate on a mega-scale, one must certainly ask whether APP will be able to implement its ‘zero deforestation’ commitment once production begins at the South Sumatra mill,” says Christopher Barr, executive director of Woods & Wayside International, a US-based firm that analyses forest governance issues. 

He adds that if the plantations fail to meet optimistic wood production targets, OKI may be forced to find alternative sources of fibre. Given that importing wood will involve higher costs, this could potentially mean further conversion of Indonesia’s natural forest and peat lands, Barr warns.

“APP has not yet released a long-term wood supply plan for the OKI mill for public review and independent verification,” Barr says. “This raises major concerns as to whether the China Development Bank and other financing institutions have rigorously assessed whether the mill will have sufficient supplies of plantation wood beyond the current rotation, which will be harvested in 2020.”

APP says that independent studies have been completed “which confirm that we have sufficient plantation resource to meet the pulp requirements of our existing mills as well as OKI. The studies confirmed the long-term viability of our 100% plantation policy. We are committed to this policy and any new supplier we engage with in the future would have to comply with this policy.”

The Indonesian group adds that “the report did forecast a minor gap in supply in 2020, but it is clear that with a harvesting rotation of around five years, improvements made now can bridge that gap by increasing productivity of supplier plantations through improved yields, better tree stock and reduction of wood loss.”

And APP says that “when OKI mill commences operations in 2016 as is typical for the industry, it will not immediately operate at maximum capacity. The facility will ramp up to its full capacity in stages in accordance to the availability of sustainable supply. Like any well-managed operation OKI mill will operate based on its capacity planning. APP would like to assure all stakeholders that its deforestation-free supply chain in line with our FCP commitment will continue to be implemented and that the company is up to the task to uphold it.”

And that’s the question that lenders to and investors in the Widjaja family businesses will be asking themselves: this time round, will they be up to the task?