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Wednesday, December 5, 2012

Olam’s biggest bond sale only delays collapse, Muddy Waters says


TUESDAY, 04 DECEMBER 2012 15:16

Olam International Ltd.’s planned US$1.25 billion ($1.52 billion) raising will only postpone the likely collapse of the commodity trader, according to Muddy Waters LLC, the research firm led by short-seller Carson Block.

The sale of a record US$750 million in bonds and as much as US$500 million of warrants announced yesterday “validates our thesis that Olam is in danger of failing,” Muddy Waters said today in a response to the raising that’s backed by Temasek Holdings Pte, Singapore’s state investment company.
Olam, the world’s second-largest rice trader, and Muddy Waters have engaged in a public war of words since Block, a 36- year-old former lawyer, said last month said he was selling Olam shares short -- borrowing them to profit by buying them at a lower price later. Olam Chief Executive Officer Sunny Verghese, who sued the research firm and Block on Nov. 21 in the Singapore High Court, described the sale as a vote of confidence from Temasek and showed its ability to get funding.

“More than anything this move is to give comfort to the market, to get that confidence back up,” Tanuj Shori, an Nomura Holdings Inc. analyst based in Hong Kong said by phone. “This issue may take time to resolve because it’s too subjective.”

Shares of Olam, also one of the world’s three largest coffee traders, climbed as much as 8.6% to $1.71 in Singapore today. The stock traded at $1.625 at 1:46 p.m. local time, trimming its decline since Block made his allegations on Nov. 19 to 6.6%.

The price of US$500 million of its 5.75% bonds due in September 2017 dropped 2 cents to 89 cents on the dollar after rebounding 7.5 cents yesterday, according to BNP Paribas SA prices. The bonds closed at 97 cents on Nov. 19. The planned sale of bonds announced yesterday, would be the company’s largest such issue, according to data compiled by Bloomberg.

The debt sales raise questions over whether Olam was running short of cash in recent days, Muddy Waters said. Olam’s associate general manager of investor relations Hung Hoeng Chow said she couldn’t immediately comment on the allegation.

Temasek, Olam’s second-largest shareholder, agreed to buy any of the US$1.25 billion in bonds and warrants not taken up by other investors. Credit Suisse Group AG, DBS Group Holdings, HSBC Holdings Plc and JPMorgan Chase & Co. will underwrite the transaction in full, Olam said.

“This is a strong vote of confidence we are seeing from Temasek, our long-term strategic shareholder,” Olam’s Verghese said at a press conference in Singapore yesterday. “This transaction also demonstrates the ability to access both debt and equity capital markets, even in current conditions.”
The capital raising was also a “180-degree reversal” of Olam’s earlier position on not raising more debt in the near future, Muddy Waters said. The agricultural commodities trader has six to eight months before failing due to its unsustainable debt position and cash burn, Block said today in an interview on CNBC.

Olam will need about $3.5 billion of fixed capital in the next four years, 40% of which would come from equity derived from retained earnings, and 60% from new debt, Verghese said Nov. 28. The company won’t issue any new equity, he said.

The US$1.25 billion offer is aimed mainly at repaying borrowings and addressing any “lingering doubts” about Olam’s liquidity, Verghese said. It is not a sale of equity, which minimizes dilution, and is about removing “nervousness” from around the company’s bonds, he said.

“Because it’s not an equity rights offer, it minimizes current dilution, which is one of the boundary conditions,” Verghese said. The company has “sufficient equity for the current horizon, which is up to 2016,” he said.

The management’s intention with the capital raising is to relieve pressure on refinancing debt due in the next year and set a lower 8% benchmark yield for the debt market, said James Koh, an analyst with Maybank Kim Eng, in a note today.

The move may hurt short-sellers because scrip lenders will have to call for borrowed stock in order to participate, Koh said. Still, it undermines management’s earlier stance that it could easily survive 12-18 months even in a credit market seizure, the analyst said, cutting Olam’s rating to sell from hold.

Olam, whose debt isn’t assessed by any ratings company, has the equivalent of US$5.8 billion of debt outstanding, of which US$2.89 billion is in bonds, according to data compiled by Bloomberg.


Muddy Waters said in a 133-page report last week that it valued Olam on a “liquidation basis, because our opinion is that it is likely to fail.” The research firm said Olam had committed a number of “accounting gaffes” over the years and will need to raise or refinance as much as US$4.6 billion of debt over the next year to remain solvent.

Olam, which counts Ernst & Young LLP as its auditor, is using the firm to “deflect questions about its accounting,” according to Muddy Waters.

Separately, the Ontario Securities Commission yesterday alleged Ernst & Young failed to conduct its audits of now- insolvent Chinese tree-plantation operator Sino-Forest Corp. in accordance with accounting industry standards.

The tree-plantation operator, which was a target of Muddy Waters, slumped 74% before eventually filing for bankruptcy protection in March. Ernst & Young yesterday agreed to pay C$117 million ($144 million) to settle claims in a Canadian class action suit against Sino-Forest, in the largest settlement by an auditor in Canadian history.

Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Kewalram Singapore Ltd. is Olam’s top shareholder with a 20% stake, according to data compiled by Bloomberg.

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