Tuesday, June 28, 2011

PT Arpeni Pratama staves off bankruptcy: Pyrrhic Victory?

Just months after Arpeni narrowly staved off bankruptcy proceedings last October initiated by Korea Securities for US $2.25 mio, Keppel yard arrested a half-converted FSO project over unpaid bills. The Group is in technical default on principal repayments of debt obligations with its senior lenders. It has been discussing an acquisition plan with Saratoga Capital and it has appointed N.M. Rothschild as financial advisors. Is Arpeni insolvent and beyond the brink?

Arpeni is an Indonesian dry cargo cabotage operator and ship agency business with a substantial 25% share of the domestic market. More than 70% of its annual turnover from intra‐Indonesian coal transportation. The group also transports general cargo like pulp and paper products, agricultural products, and heavy equipment; and liquid cargoes, such as crude oil and clean petroleum products. Its fleet consists of tugboats, barges, vessels, and floating cranes. The dry cargo vessels are mainly over-age Panamax units. Most of the tankers are small coastal vessels over 15 years age.

Arpeni's liquidity deteriorated rapidly from early 2009 as a result of weak credit control, crystallization of significant derivative liabilities, and a general softening in the operating environment, particularly the international dry‐bulk shipping market to which the company is partly exposed and has worsened this year. Net losses in 2010 widened to Rp1.64 trillion (US$ 190 mio) from Rp 670.61 billion losses in 2009. This includes asset impairment charges.

The outlook for the Indonesian economy is favorable for the next two years, but it would be badly exposed to slow-down or hard-landing in China, should there be a reduction of infrastructure projects likely to take place in 2013-4 as projected by RGE.

Saratoga Capital was reported to be discussing an acquisition deal last October including the purchase of US$ 60 mio convertable bonds. They would bring in synergies. They manage a coal barging investment, related to their Adaro business. They could be a driver for revitalized management. The obstacles are looming insolvency and legal actions.

Arpeni is carrying a lot of unsecured debt that cannot easily be verified. Its secured debt is increasing due capex (note Keppel arrest above) and bank facilities to fund working capital requirements due perilously low liquidity. Restructuring appears quite complex given the large number of constituencies involved.

It is currently seeking US$ 95 mio issuing convertible bonds, warrants, and new shares through non-preemptive rights in part of a company rescue plan.

With a CCC credit rating, senior debt default, legal actions, operating losses and a dicey fixed asset base; this seems a highly risky play for investors to put new money, unless there were substantial involvement of Saratoga Capital with their tight control to revitalize management.

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