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Olam: Renounceable Underwritten Bond-Cum-Warrant Rights Issue.

Monday, December 3, 2012

Olam, in response to Muddy Water's claims, said that they "have more than enough capacity to meet ... repayment obligations of S$1.5 billion in the next 12 months, as well as ... likely capex of S$1-1.25 billion in the same period" and that "without raising any further debt (they) can easily meet ... debt repayment obligations and pursue ... planned Capex, in addition to meeting the on-going working capital needs." Then, why are they issung bonds-cum-rights now?

This reminds me of CitySpring Infrastructure Trust's claim a few years ago that they did not have to issue rights and that people who said they had to didn't understand their business. It could also be a coincidence that Sunny Verghese was also the chairman of CitySpring Infrastructure Trust then.

Each 1,000 shares owned will get to subscribe for 313 bonds with a face value of US$1.00 each. The bonds have a 5 year tenor and a coupon rate of 6.75%. This unsecured bond will raise some US$750m for Olam.

Each 1,000 shares owned will also be given 162 free warrants. Strike price of warrants is US$1.291. The warrants expire in 5 years and cannot be exercised in the first 3 years. This will raise US$500m for Olam if all the warrants are eventually exercised.

Full details here:
Olam International announces proposed US$750 M Renounceable Underwritten Bond-Cum-Warrant Rights Issue

Rights issues to strengthen the balance sheet is bad news for shareholders as it dilutes EPS (eventually, in this case). It also admits that the balance sheet was weak in the first instance. What are shareholders to do? It is Hobson's choice.

"Temasek is committed to take 100% of rights not subscribed by existing shareholders." Just like the case with CitySpring Infrastructure Trust, Temasek Holdings could end up enlarging its share of Olam.

"The Transaction is available to all its equity shareholders and provides a unique and rewarding opportunity to participate in the long term growth of the Company." This requires a leap of faith and I certainly hope for all shareholders that things improve from here.

Share price could take a hit tomorrow. $1.35 perhaps?

Related post:
Olam: A time bomb?


AK71 said...

SINGAPORE, Dec 3 (Reuters) - Singapore's Olam International Ltd, under attack by short-seller Muddy Waters for its alleged aggressive spending, accounting practices and debt levels, announced a rights issue on Monday consisting of bonds and warrants.

Singapore's Olam announces $750 mln rights issue of bonds, warrants.

AK71 said...

Olam's share price opened higher and is currently +7%. Olam has pulled a hat trick!

Good news for shareholders. :)

Ray said...

Olam's management really aggressively defending their share prices. CEO bought 1mil shares last week i think. shortists should beware for now. until some deep sh!t get uncovered... ;)

AK71 said...

Mr. Block et. al. should run for cover now that Olam has rolled out the biggest gun of all, Temasek!

Ray said...

it is scary that our hard earned money (taxes) are being used to defend shares.... sigh

AK71 said...

Perhaps, I am missing something here. Perhaps, there is something I don't know that Temasek knows. Otherwise, I think shareholders are getting a rather raw deal.

AK71 said...

Maybank Kim Eng downgraded Olam International Ltd to "sell" from "hold" on Tuesday and cut its target price to S$1.42 from S$1.75 after the Singaporean commodities trader announced its fund-raising plan.

OCBC Investment Research said Olam's management hopes the move will help to dispel any lingering doubts about the company's viability and solvency, thus shoring up its bond and share prices.

"While we think that there could be some near-term boost to its share price, we note that outlook for the next six months remains quite muted," OCBC said. It maintained its "hold" rating and S$1.44 target price on Olam.

ThinkOutOfTheBox said...

I guess Olam is trying to prove that it can access funds easily to pay back it's debts and it wouldn't go bankrupt.

Which has proven MW wrong...

AK71 said...

As long as Temasek is willing to put its weight behind Olam, I guess shareholders could avoid that sinking feeling. ;p

Ultimately, Olam is still borrowing. Borrowing from one lender and repaying another lender.

Until Olam is able to show an improvement in free cash flow, it is not out of the woods.

See: The cash flow statement.

AK71 said...

Olam is not the failed Enron.

"As part of a 10-point plan for Olam in an article in Singapore’s Business Times newspaper yesterday, Dee called for the company to sell stock instead of issuing bonds, saying “the supply of cheap debt is over.” In the interview today, Dee reiterated that Olam needs to reduce debt, “take a breather from rapid expansion” and be more transparent..."

AK71 said...

Macquarie downgraded Olam International to ‘neutral’ from ‘outperform’ and cut its target price to $1.60 from $2.40, saying some of the Singapore commodities firm’s projects are taking longer-than-expected to come through.

Olam shares were up 1.4% at $1.47 on Friday. But the stock has fallen more than 15% since short-seller Muddy Waters launched a scathing attack on the company’s accounting, debt and investment projects on Nov. 19.

"While we disagree with Muddy Waters’ assertion that Olam stands on the brink of insolvency, we do take their point that some of Olam’s new upstream and midstream projects have lagged expectations. In fact, as a group, the new projects had already missed our expectations in 2012 fiscal year," Macquarie said.

Muddy Waters discovered that Olam’s greenfield Nigerian sugar mill has been postponed indefinitely, Macquarie said, adding that this has been confirmed by Olam. A key urea project in Gabon also remains uncertain, Macquarie said.

Macquarie said its earnings estimates are 20-25% below consensus for 2013-2014 fiscal years.


AK71 said...

It would seem that my pot shot price target of $1.35 is not too far off the mark... ;p

AK71 said...

UBS analysts Andreas Bokkenheuser and Anubhav Gupta reduced Olam’s 12-month target price by more than half to $1.33 from $2.95, they said in a report today.

Olam’s earnings quality has deteriorated as the gap widens between earnings reported by Olam and earnings adjusted for items including changes in fair value of biological assets, negative goodwill, and government grants, according to UBS. Assumptions in determining fair value put earnings quality at risk, the analysts said.

Borrowing costs are also an area of concern as the company may need to refinance its debts in the next two years, the UBS analysts said.

Olam cut to sell by UBS on concern financial health worsens (Updated)
Wednesday, 09 January 2013

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