December 4, 2012 / 4:56 AM / in 7 years

UPDATE 2-Olam debt concerns persist after cash call

* Shares rise as much as 8.6 pct after rights issue plan

* Temasek fully underwriting bonds-with-warrants issue

* Maybank Kim Eng downgrades Olam to ‘sell’ from ‘hold’

* Olam said last week it wouldn’t need to tap debt mkts soon (Rewrites with concerns over debt, analyst comment, background)

By Eveline Danubrata and Umesh Desai

SINGAPORE/HONG KONG, Dec 4 (Reuters) - Olam International Ltd’s $1.2 billion cash call lifted its shares but failed to ease concerns about the Singapore commodities firm’s financial position after its CEO only last week said it would not tap debt markets for the next five to six months.

Olam managed to get full backing from powerful Singapore state investor Temasek Holdings Pte Ltd, its second-biggest shareholder, for a complex bonds-with-warrants issue to battle short-seller Muddy Waters. The move sent its shares up more than 8 percent to a nearly two-week high on Tuesday.

But critics including Muddy Waters and several analysts warned that Olam needs to shore up its weak cash position after piling up debt to finance expansion.

“This rights issue has not addressed ongoing concerns regarding low margins, high leverage, and the need for cheap funding amidst wafer-thin 5 percent EBITDA margins,” said Owen Gallimore, ANZ credit strategist.

Olam borrowed heavily to fund its expansion beyond trading into the actual production and processing of agricultural commodities from cotton to coffee to cashew nuts.

Bond markets have grown jittery over debt which totalled S$8.4 billion ($6.9 billion) at the end of September.

Muddy Waters, which two weeks ago launched a scathing attack on Olam’s accounting, debt and investment projects that sent its bond and stock prices tumbling - and ultimately spurred the rights issue plan - said the move only validated its thesis that the company is in danger of failing.

“Our view remains Strong Sell,” it said, adding that the fund raising “merely postpones the collapse that we feel is almost inevitable”.

Olam has sued Muddy Waters in a Singapore court and issued a detailed rebuttal of the short-seller’s allegations, saying it was not at risk of insolvency and had enough liquidity.


Olam’s rights issue, which was originally put together by Olam and taken to its banks and then to Temasek, is intended to bolster the commodity firm’s liquidity and is seen by analysts as a strategy that could put the squeeze on short-sellers such as Muddy Waters.

Temasek, which owns 16 percent of Olam, has committed to fully underwrite the $1.2 billion issue, potentially raising its stake as high as 28 percent if other shareholders do not participate, an Olam spokeswoman said.

Olam shares were up 2.2 percent at S$1.61 late in Tuesday’s session, retreating after a surge as high as S$1.71 a share.

Bond prices were choppy after rising late on Monday following the fund-raising announcement. Olam bonds due in 2017 are trading at 90/92 cents on the dollar and the 2020s are at 92/93.

Heavy ownership by retail investors, who are attracted to the high yield, make Olam bonds especially volatile. Olam 2020s are nearly half-owned by retail investors and 2017s have 70 percent retail involvement.

The main idea behind the fund-raising plan is to “break the negative cycle” of high bond yields filtering through to the equity market, said James Koh, an analyst at Maybank Kim Eng.

The rights issue will be a short-term positive for the stock, Koh said.

“However, management’s earlier stance that it could easily survive 12 to 18 months even in a credit market seizure may now sound hollow and minority shareholder confidence may be eroded,” he added. He cut his rating on Olam shares to “sell” from “hold” and lowered his target price to S$1.42 from S$1.75.

Last week, Olam Chief Executive Sunny Verghese told Reuters in an interview that the company had sufficient cash and did not expect to tap the debt markets for at least five to six months.

But late on Monday, Olam surprised the markets by announcing that it would issue a nominal $750 million of 6.75 percent five-year bonds at a price of 95 percent, raising $712.5 million.

The bonds have warrants attached that will allow holders to buy a total of 387 million shares at $1.291, which would raise $500 million if they were all exercised.

Temasek said in supporting the bond issue that it also backs Olam’s strategy to add on more upstream and midstream capabilities - an approach that has loaded it with debt as it bought up flour mills and dairy operations from Nigeria to Uruguay.

The financial burdens of that strategy remain a worry for investors.

Citing uncertainty on whether Olam’s myriad of acquisitions will succeed, and a continued propensity for expansionist growth and high gearing, OCBC said in a note that it was less confident about Olam’s long-dated bonds.

“Olam is still in a negative FCF (free cash flow) position as CFO (cash flow from operations) remains volatile and capex remains high,” it said.

Credit Suisse, DBS Bank, HSBC, and J.P. Morgan were joint bookrunners, lead managers and underwriters for the transaction. (Additional reporting by Saeed Azhar and Anshuman Daga in Singapore, Umesh Desai in Hong Kong; Editing by Edmund Klamann)

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