The virtual shutdown of global credit markets since the collapse of Lehman Brothers in mid-September added further pressure across the Asian CB universe and, at one point, the Olam CB was quoted in the low 40s. The latest quote puts it at 50 to 55 cents to the dollar, although market participants say there is no trading in the bonds.
By buying back the bonds below par, the company will be able to make a profit, while also reducing its high gearing somewhat. At the same time, the tender is providing an opportunity for the bondholders to exit their holdings û something which is quite hard to do at the moment because of thin, or virtually non-existent, trading volumes. Like many other CBs issued this year, Olam has not been a good trade for investors, but the bonds are trading so deeply out of the money at the moment that they may feel they are better off to cut their losses and release the capital.
The exercise should also help lift the price in the secondary market since the tender will absorb the demand from investors who are desperate to sell and who are putting downward pressure on the convertible. That ought to be positive for investors who want to continue to hold the bonds too.
Equity investors reacted positively to the news, sending OlamÆs share price 10.8% higher in Singapore trading yesterday to 97.5 Singapore cents. However, the share price has dropped 70% since the CB was issued, in line with the collapse in demand for commodities. The CB came on the back of a two-month share price rally (when sentiment for commodities was still upbeat) that lifted the stock 68% and at the time of the issue Olam was trading only 4.8% below its 2008 closing high of S$3.13 that it had hit three days earlier.
The tender is being conducted as a so-called Dutch auction, which means investors can tender the CBs at whatever price they feel is realistic. The company, together with tender agent J.P. Morgan, will then determine what will be the final price, i.e. the price at which investors will sell the bonds back to Olam. The tender opened yesterday morning and is due to close at noon today Singapore time.
OlamÆs offer comes about a month after Korean construction materials manufacturer KCC Corp bought back $183 million of an exchangeable that was issued in October 2007 through the same kind of tender process. That deal too was arranged by J.P. Morgan. Sources say KCC was the first Asian company to buy bank equity-linked paper through a tender for more than 10 years and the fact that it is happening now is a clear reflection of how depressed the markets are. KCCÆs EB was quoted at 75% of face value when the tender was launched in early November and after evaluating the bids, the company decided to sell at 82%.
KCC received more than 175 bids from investors who wished to tender the exchangeable. The bids represented $400 million worth of EBs out of the initial $1 billion issue. The company had offered to buy back up to $200 million and after evaluating the price, it settled for buying $183 million worth.
The Olam bonds, which were jointly arranged by J.P. Morgan and Macquarie, pay a 1% coupon and can be put back to the issuer on the third anniversary. They were issued with a conversion premium of 30% and a yield to put of 4.5%. They are trading so deeply out of the money at the moment that investors may feel they are better off to cut their losses and release the capital.
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