APP signed a master restructuring agreement with creditors led by nine foreign-government export-credit agencies -- including those of Japan and several European nations -- and the Indonesian Bank Restructuring Agency, a government body, which is APP's largest creditor.

Creditors holding about 40% of the $6.7 billion debt -- the amount owed by APP's Indonesian companies -- signed the agreement, said IBRA Chairman Syafruddin Temenggung. APP creditors holding at least 90% of debt must vote in favor of the plan before it becomes effective under the terms of the agreement.

IBRA hopes to have sufficient creditor support for the plan by March 31, Mr. Temenggung said. "Even after we signed the agreement today we still have a tough task to convince as many creditors as possible," he said.

The agreement is the product of months of wrangling between creditors and APP, which stopped making payments on its total $13.9 billion debt over two years ago, making it one of the largest defaulters in emerging-market history. The company, which is based in Singapore but has operations in Indonesia and China, owes money to hundreds of foreign creditors ranging from the export-credit agencies to pension funds and individual bondholders.

Getting other creditors to sign up could prove difficult given widespread criticism from those not involved in the deal about what they claim to be lenient treatment of APP. Under the agreement, a third of the $6.7 billion in debt involved won't be repaid for as long as 22 years.

The U.S. Exim Bank, which until recently had been part of efforts to spearhead the talks with the other export-credit agencies, launched a lawsuit Wednesday in a New York court in a bid to recover $104 million in debt owed by APP.

"Unfortunately, we believe that the final debt restructuring proposal is not fair and equitable to APP's creditors, and its repayment structure doesn't adequately reflect APP's ability to service its debt," the Exim Bank said in a statement.

A lawyer for White & Case LLP, APP's lawyers, said in Jakarta that the firm would contact the Exim Bank in an effort to stop the lawsuit and keep Exim involved in the consensual debt restructuring.

Other creditors have been taking separate legal action. Last week, the New York State Supreme Court affirmed that three U.S. fund-management companies have legal claims on assets pledged as security for borrowings by APP's Indonesian units. The creditors who sought the ruling -- GE Capital Corp., Oaktree Capital Management LLC and Gramercy Advisors -- also want a more favorable settlement of debts owed them by the APP units. Those debts total about $250 million in principal and unpaid interest on promissory notes issued by the units and guaranteed by APP.

Still, many APP creditors have argued for an out-of-court approach to the talks, saying legal action abroad, even if successful, is unlikely to be enforceable in the Indonesian court system.

Indeed, their lack of confidence in Indonesian courts was a major factor behind the decision by foreign export-credit agencies to reach a negotiated settlement with APP instead of going to court in Indonesia. Foreign export-credit agencies, including the U.S. Exim Bank, are owed $960 million by APP, the largest combined total of any foreign creditor group. IBRA is owed slightly more than $1 billion.

Deutsche Bank AG, which launched an unsuccessful legal action in Singapore against APP last year, was among those signing Thursday, said Andrew Saker, a director at Ferrier Hodgson, an advisory firm which is working with the foreign export-credit agencies.

The German bank, which is owed $193 million by APP, and BNP Paribas SA petitioned a Singapore court in 2002 to appoint an independent management for the company during the restructuring, but the action was unsuccessful. The banks argued that Indonesia's Widjaja family, the founders of APP, should be removed from management during the restructuring.

Under the Thursday agreement, the Widjajas will continue to run day-to-day operations of the company. The family has recently drawn criticism for trying to shield their China assets from claims by creditors to other parts of the group. "The family and APP's management are committed to the consensual [debt restructuring] agreement," Franky Oesman Widjaja, an APP director, said at Thursday's signing ceremony.

Other creditors that have opposed the plan, including some private bondholders, should give their support, said Yukio Kitazume, a vice chairman of Nippon Export and Investment Insurance, Japan's government export-credit agency. APP's bond prices have been improving on the secondary market in recent weeks, showing investors expect the deal to move forward, he said.

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APP focuses its resources on China.

By SHAWN DONNAN AND RICHARD MCGREGOR.

Creditors of Asia Pulp & Paper, the Singapore group responsible for the largest default in emerging markets history, have long suspected that the company controlled by Indonesia's Widjaja family has been buying back its own debt at a discount.

The often murky distressed debt market means the creditors, which include some of the world's leading investment houses, banks and export credit agencies, have no way of proving the Widjajas are reclaiming strategic parts of the $13.9bn on which they stopped payments in March 2001. The company and the family deny using their cash for buying debt back at a discount rather than servicing it.

The group's creditors believe a debt-for-equity swap announced on Friday by APP's primary Chinese holding company, APP China Group Ltd (ACGL), under which that company's creditors will be given a chance to take control of 99.9 per cent of its shares, provides yet more grounds to support their fears.

There would be nothing illegal in APP buying back its debt and the allegations are as much a symptom of the long-running atmosphere of suspicion between APP and its creditors as anything else.

But APP's story continues to provide what some see as worrying lessons for foreign lenders and bondholders involved in restructurings in Asia. It is also an enduring reminder of how differences in Asian legal systems can hinder creditors trying to get their money back.

If the APP case had occurred in the US or the UK, analysts say, the group would be run by a court-appointed administrator who would use cashflow to pay off debt rather than buy it back at a discount.

APP claims the ACGL scheme of arrangement is the result of pressure from Chinese banks and "is also in the best interest" of the group's other lenders.

Creditors, however, see it differently.

They say the only logical reason for APP's move is to isolate its Chinese operations from claims by creditors owed some $4.5bn by APP's Singapore parent company.

The debt-equity swap would leave the Singapore holding company with just 0.1 per cent of ACGL, barring the parent's creditors from making significant claims on the Chinese operation.

"Maybe there are people less cynical than me," one major creditor said. "But the way I see it, if you're a creditor of that Chinese holding company then you're a Widjaja.

"If I was a creditor of the [Singapore] holding company I'd be really pissed right now."

APP's China units are estimated to owe $2.8bn. According to court documents, ACGL owed $629m of that to outside parties as of the end of March, $487m of which is related to a 2000 bond offering of ACGL bonds on which the company owes $143.4m in unpaid interest. Those bonds, analysts and creditors say, make the Chinese holding company's debt an easy target for the family.

The ACGL bonds once traded on par with the Singapore holding company debt. But the ACGL 2010 bonds last traded around 35 per cent this month, while the Singapore holding company's bonds were in the low single digits.

That discrepancy, analysts and creditors believe, is an indication the Widjajas have been active in the market for the Chinese holding company debt.

"The bid continues to be out of Indonesia or one of the investment banks that is thought to be acting for the family," one Hong Kong-based analyst said yesterday.

"You've never seen a hedge fund or a distressed fund come in and say 'I'm going to buy APP China debt because there's intrinsic value there.'"

Teguh Ganda Wijaya, CEO of the family's Sinar Mas group, denied through a family representative that the company or the family had been buying back debt. "APP has not bought any of these bonds. The family has not bought any of these bonds," he said.

Creditors have long believed the Widjajas, who are ethnic Chinese, have always planned to protect APP's mainland subsidiaries and relocate to China in the long-term.

The embattled family maintains a low profile in Singapore and in Indonesia, where APP says it will on October 24 sign a $6.7bn debt work-out deal for its Indonesian subsidiaries.

But in China the family's profile is rising.

The Shanghai skyline features a $400m skyscraper, the Bund Centre, built by a unit of Sinar Mas, while Elijah Frankle Widjaja, the family member responsible for the project, is a regular feature with his wife in the pages of Shanghai Tatler, the magazine which tracks Shanghai's social affairs.

Mainland China is home to APP's largest plants and is also the focus of expansion plans.