Asia pulp & Paper Co's plan to divest its China unit may prevent creditors owed US billion from seizing the Chinese business, tightening the founding family's hold on assets that generate half the group's revenue.

　　Asia pulp plans a debt-for-equity swap that would give the Widjaja family at least 23 percent of APP China group Ltd, a unit they are spending more than US billion to expand, documents outlining the plan dated on September 26 show. Creditors say they are concerned the family has been buying bonds that could be swapped into a majority stake of the Chinese unit. The family denies it.

　　"There has been widespread market speculation that the controlling shareholders of the APP group have been purchasing APP China bonds insgroupsto protect their ownership in the China operations," said Rob Rauch, a director at Gramercy Advisors LLC, a US distressed-asset fund that owns Asia Pulp bonds.

　　Cutting the China unit from Asia Pulp, the group's Singapore-registered holding company would remove about US.5 billion in revenue a year that could go toward paying debt. It would also mark another victory for the Widjajas in their bid to keep creditors such as Deutsche Bank AG, GE Capital Corp and BNP Paribas SA from seizing their mills in Indonesia and China.

　　On page 87 of the 194-page document outlining the plan, the company says bondholders owning a majority of APP China's debt will vote for the swap and that they would "agree among themselves policies relating to the management and business affairs of APP China." It didn't identify the bondholders.

　　Asia pulp, the region's biggest paper company outside Japan, stopped paying creditors in March 2001 because it could no longer service debts piled up under the leadership of Chief Executive Teguh Widjaja to expand into China.

　　The company's latest plan underscores the difficulty of forcing a solution on the Indonesian-Chinese family.

　　Even though Asia Pulp hasn't agreed on the terms for repaying that debt, it has ordered about US million of pulp machinery for a plant on Hainan Island, plans a US million expansion to produce packaging products in the eastern city of Ningbo, Zhejiang Province, and has invested US million in five forestry ventures.

　　Creditors of APP China, a Bermuda holding company for the group's 13 Chinese mills, will on October 30 vote on a plan to convert US million of debt to 99.9 percent of the company's equity, Asia Pulp said in a September 26 statement.

　　App china is able to produce 1.7 million metric tons of paper products a year and process 2.1 million tons, the share-swap documents show. Net sales in the first quarter were US.5 million, operating profit was US million and it had a net loss of US.7 million.

　　"One of the biggest assets to salvage is APP China. It had state-of-the-art technology prior to the group going into default," said Lloyd Ong, a Singapore-based credit analyst at Barclays Capital Asia Ltd.

　　The widjaja-owned BII Bank, a Cook Islands lender, would get a 23.1-percent stake through swapping US.8 million it was owed by APP China as of March 31, the documents show.

　　App china's remaining debt is US.9 million of bonds and US.4 million of accrued interest on those bonds, the holders of which would receive the remaining equity.

　　Indra widjaja, a son of the Asia Pulp founder Eka Tjipta Widjaja, who has participated in debt restructuring talks, has denied the family owns any APP China bonds.

　　Asia pulp said the debt-for-equity swap was intended to remove the risk that competing claims by creditors would cause a scramble to seize the assets of the Chinese operations.

　　The mostly state-owned Chinese banks owed about US.7 billion secured against the Chinese mills have said they were concerned at the risk of international creditors trying to seize control of the group's assets, Asia Pulp said.

　　Last year, Deutsche Bank and BNP made a failed attempt to replace Asia Pulp's management using Singapore's High Court. In their application they cited the Widjajas' failure to begin earnest negotiations on settling the group's debts, and the difficulty of enforcing their rights in Indonesia's courts.

　　Talks are hampered by a lack of legal protection in Indonesia and China and divisions among creditors.