Commodity demand spurs interest in Olam CB

The $300 million bond is priced with a 30% premium, while the coupon and yield are both set at the wide end of terms with the aim of exercising the $100 million upsize option.
Olam International, a global supply chain manager and trader of agricultural products and food ingredients, has raised $300 million from a convertible bond that attracted strong interest from buyers but, in the end, priced at the best terms for investors.

A source notes that OlamÆs management is keen to ensure that the bonds trade well in the secondary market so that it will be able to exercise the $100 million upsize option. JPMorgan and Macquarie were the joint arrangers for the CB, which after the pricing late last night was quoted just over par at 100.75. The deal attracted more than 75 investors, including some existing shareholders of the company who picked up the bonds on an outright basis for the equity story. The majority of the demand came from specialist CB investors, though.

The Singapore-listed company is raising money to support its cash-intensive business, but also to allow it to continue its strategy of growing through numerous small acquisitions. In April, the company also raised S$307 million ($225 million) from a 1-for-10 preferential share offering, and while CEO Sunny Verghese said at the time that the management was confident that medium-term growth plans had been ôappropriately fundedö, the company likely felt that the current opportunity to sell convertible debt was too good to miss.

For one, the sentiment for commodities is still favourable, although rising inflation is now looming as a threat to the global economy and, in extension, to commodity prices. OlamÆs share price has also rallied 68% in the past two-and-a-half months on the back of the demand for commodities and is currently up 4.2% on the year, compared with a 10% decline in the Straits Times index. YesterdayÆs close of S$2.98 is only 4.8% below the closing high of S$3.13 that it hit three days ago.

ôThe share price has had a good run and, while the market is starting to get jittery, it remains open, making this a good opportunity for the company to raise cost-efficient funding,ö says one source close to the transaction, adding that there is a possibility that the market conditions could get worse next week.

The premium was fixed at the bottom of the indicated range of 30% to 40%, but even a 30% premium must be seen as a pretty good outcome for the issuer since it is coming on top of a share price that is already quite high. The premium was set over the volume-weighted average price on June 3 and 4, which at S$2.9588 was slightly below the closing price in yesterdayÆs morning session. (The stock was suspended from trading in the afternoon to allow the marketing of the CB to get under way). This means the effective conversion came out at 29%.

The coupon and yield were both fixed at the wide end of indicated terms, resulting in an annual coupon of 1% and a yield-to-put of 4.5%. The coupon was offered at 0.5%-1%, while the yield was indicated at 4% to 4.5%. The bonds have a five-year maturity, but can be put back to the issuer after three years. There is also a mandatory conversion feature after three years, subject to a 130% accreting trigger.

To preserve its cash flow, the company has the right to pay bondholders who choose to exercise their put option or hold the bonds to maturity in shares instead of cash. The shares have to be issued at a discount to the market price at the time, but the option is still beneficial to the company as it wonÆt run the risk of having to face a large outlay at a time when it may need the cash for its day-to-day operations. Observers say investors are usually ok with this as long as the stock is quite liquid. The same arrangement was used on a $920 million CB for Singapore property developer CapitaLand in late January, which was also arranged by JPMorgan.

The credit spread was indicated at 400bp over Libor, which compares with the credit default swaps for fellow commodities trader and supply chain manager Noble Group which on a three-year basis are indicated at about 300bp. Noble is slightly larger than Olam in terms of market cap, but more importantly it also has a credit rating that straddles the line between investment grade and high yield, while Olam is not rated. There is no doubt therefore that the latter should come at a wider spread, but the question is how much wider. Some specialists said last night that they felt 400bp was too tight.

The bookrunners didnÆt provide any credit bid at all for the deal, although sources say there is plenty of stock borrow available in this name at 1%-1.5%, giving bond holders the option to hedge the equity option instead. Meanwhile, the conversion price will be adjusted for dividends above a fixed schedule, starting from 3.95 Singapore cents for the fiscal year to June 2008 and allowing for 15% growth per year thereafter. Based on these assumptions, the bond floor ended up at 91% and the implied volatility at 28%. At a credit spread of 450bp, the implied volatility would increase to 32%, which is still well below the 100-day volatility at over 70%.

The availability of stock borrow was another reason why the investors liked the deal alongside the lure of the commodities sector, but even more important, sources say was the quality of the company and its good image in the market.

ôInvestors like the business model and the way the management has been growing the company in a very professional way,ö says one of them, noting that Olam has a stated strategy not to buy companies that exceed 15% of its own market capitalisation, thus ensuring quick integration.

Yesterday the wires reported that the company had been selected the winning bidder for the assets of a bankrupt cotton producer in the Ivory Coast, citing a legal notice in a local government-owned daily. The acquisition, which had been rumoured for a few weeks and will cost Olam about $19 million, includes 100,000 hectares of cotton fields cultivated by around 50,000 growers and four ginning plants in the previously war-torn northern part of the country, Reuters reported.

In mid-May the company posted a greater-than-expected 38.5% year-on-year increase in net profit to S$55.9 million for its fiscal third quarter that ended in March, which it said was achieved partly on account of a sustained high growth rate of it existing businesses, but also because of the value and earnings-accretive acquisitions it had made. According to a statement, the five most recently bought businesses û Queensland Cotton, Universal Blanchers, Naarden, Key Foods and PT DUS û accounted for 7.9% of the growth in Sales Volume and 41.8%, or S$18.4 million, of the total growth in net contributions, which the company views as the best measure of its operating performance.

Olam currently has a direct presence in 56 countries where it sources and processes 14 different products that it then supplies to more than 4,000 customers in 60 markets. According to its own account, it has built a global leadership position in many of its businesses, including cocoa, coffee, cashew nuts, sesame, rice, cotton and teak wood.

According to the term sheet, the CB proceeds will be used to refinance existing debt, to fund potential acquisitions and for general corporate purposes.

¬ Haymarket Media Limited. All rights reserved.
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