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Olam Raises Debt At a High Price Despite Saying They Do Not Need Near Term Financing

12.12.2012 · Posted in Dividend Stocks, Singapore

The recent announcement by Olam that they will be raising debt with warrants of US$1.25 bil is nothing short of shocking. This comes right after the CEO Sunny Verghese saying that they did not need to go back to bond markets for another 6 months or so. The fact that they suddenly turned around makes their credibility questionable.

 

High Cost of Debt

For each 1000 shares, rights will be issued to buy 313 bonds priced at 95cents on the dollar. These bonds come with a 6.75% coupon making them effectively 8% in yield. This is far higher than any of the bond issues Olam had done in the past few years. It shows a dramatic rise in risk levels.

 

 

Warrants Attached Makes the Rights Even Pricier

What’s worse is that the bonds are stapled with 162 free warrants to subscribe to Olam at $1.575 within the next 3-5 years. With the warrants, Carson Block estimates the effective cost to be in excess of 10%.  Existing bond prices have dropped significantly, resulting in higher yields of up to 12%. So the cost of borrowing is extremely high now, reflecting the risks of Olam and may be unsustainable as Olam is significantly overleveraged and has huge cash burn. The cost of new debt is much higher now and Olam may be in trouble as the older debt tranches mature.

 

 Temasek to Underwrite The Issue, A Bailout?

Why does Temasek need to underwrite the issue if banks were still lending money freely to Olam? Muddy Waters thinks that this is more of a bailout and confirms their theory that Olam was within days from collapsing. While days from collapsing may be somewhat exaggerated, the fact that Temasek has to underwrite the deal does say a lot about the bank’s support for Olam at this point. Remember that some of the REITs were forced to issue highly dilutive rights issue as they were unable to refinance their debts when the banks turned off the taps.

 

Olam’s Counter Reports Do Not Effectively Address Muddy Water’s Claims

After reading Olam’s counter reports, they have little to offer in terms of the huge accounting discrepancies highlighted by Muddy Waters.  They also countered with a lawsuit which is useless and simply a waste of resources. It was a mistake to simply dismiss the 133 page report as there were a lot of issues raised which needed to be answered.

 

Olam’s Refusal To Take Muddy Waters Offer For a Rating Was a Big Mistake

Another mistake is for Olam to refuse to take up Muddy Waters offer a debt rating. Even Noble Group debt are rated, so why the fear of a proper debt rating for Olam? Unless they are afraid that a poor rating would push yields to even more unsustainable levels. Even then, the right move would be to bite the bullet and then try to address concerns raised by the debt rating agency to bring confidence back to investors.

 

It will be interesting to see how all this plays out. Bond holders who have debts maturing next year should hopefully be safe as the company is unlikely to fall that soon. The future debt maturities though are questionable. This can be seen by the drop in prices due to the higher duration for longer maturity bonds. Perpetual bond holders are the worst hit as they bought at par and now the perpetuals are trading less than 80cents on the dollar.

 

For further reading, you may be interested in:

Muddy Waters Initiates Coverage on Olam with Strong Sell

Olam plunges in price after famous shortist Carson Block questions their accounts

Snapshot of Palm Oil Sector October 2012

Palm Oil Plantation Stocks Tree Maturity Profiles

Listing of Felda Global Ventures Bhd

My Singapore Stock Portfolio Early September 2012

7 Responses to “Olam Raises Debt At a High Price Despite Saying They Do Not Need Near Term Financing”

  1. This is Olam’s management reply during a meeting with swiss private bank on behalf of HNWs.

    http://thewealthjourney.blogspot.sg/2012/12/olam-bonds-worth-buying.html

  2. Hi Calvin, thanks very much indeed for the generously sharing of your great analysis. If one is to invest in a commodity stock, which one would you recommend Wilmar, Noble, Golden Agri or Olam at current low price? Would you think that at the current price, we could start accumulating them? Thanks so much!

    • Hi Casey, as mentioned, I prefer primary producers rather than supply chain traders. So yes, Golden Agri is one stock which I bought earlier. I bought Golden Agri at close to $0.62, so I would wait for around $0.60 or lower before going in. CPO on the whole still doesn’t look positive so there might be a good chance for the palm oil stocks to fall.

  3. Hi Calvin,
    There are another 2 questions and hope that you can advise further.
    Do you think cash flow is the only main problem that Olam might be experiencing?
    Do you think that what Olam has vested is far less attractive than what it has claimed?
    If Olam is not over leverage, do you think its business is more attractive than Noble?

    Many thanks indeed!
    Casey.

    • Hi Casey, Olam is not only experiencing problems with its cash flow but also its ability to grow organically without resorting to acquisitions. I think there is definitely some truth in the acquisitions being non performing, there are many corporate M&As which destroy value for shareholders.

      I have not studied them in detail, but I am neither interested in Olam nor Noble as Noble’s leverage is also very high and margins are very low.

  4. Hi Calvin,
    This rights issue looks complicated to me, is it possible to explain in smipler terms what it meant to shareholders? When you say 8% yield, do you mean anyone who buy the bonds will achieve 8% yield? Can the bonds and warrents be traded in SGX?
    Maybe you can also consider conducting a course in this area so that investors can decide better when companies offer rights issues. I tried to read about warrents and bonds, but can never understand them.

    • Hi TL, the 8% is achieved because the coupon is 6.75% and is issued at 95cents instead of par. If it was issued at par, then the yield would simply be 6.75%.

      All current Olam shareholders will receive the rights before ex-rights date. The rights should be be traded on SGX, just like normal rights issue until expiry date. The holders of rights will choose whether to exercise their rights or to sell them before expiry. If expiry date lapses without any action from them then the rights become worthless. Once the bonds with attached warrants are issued, I don’t think they are tradeable on SGX unless they structure them as retail bonds.

      That’s a good idea, although I am not sure whether it can fill a half day or one day course.

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