Olam plans rights issue of bonds with warrants

The deal may raise a combined $1.21 billion and comes as Muddy Waters accuses the Singapore-listed company of being too aggressive on spending and debt.
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Olam: Investing in upstream production of cocoa and other agricultural commodities has been costly
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<div style="text-align: left;"> Olam: Investing in upstream production of cocoa and other agricultural commodities has been costly </div>

Olam International, the Singapore-listed supply chain manager and processor of agricultural products that has come under attack by short-seller Muddy Waters, is planning a renounceable rights issue of bonds with warrants that could result in a combined cash inflow of about $1.21 billion.

In an announcement issued late last night the company said it will offer $750 million worth of five-year bonds with a 6.75% coupon to its existing shareholders. The bonds will issued at 95% of the principal value resulting in total proceeds for $712.5 million. Attached to the bonds will be approximately 387.365 million warrants that can each be converted into one share at an exercise price of $1.291 per share. The warrants, which will have a five-year maturity and can be exercised after three years, will bring in a combined $500 million when exercised.

The rights issue has the support of Temasek Holdings, which owns 16% of the company. The Singapore government investment company will take up its entitlement of bonds and warrants in full and will also sub-underwrite the rest of the issue, in other words it will buy any bonds and warrants that are left unsubscribed at the end of the transaction.

For the past two weeks Olam has been vigorously defending itself, verbally and in writing, against accusations from Muddy Waters that its spending and debt levels are too aggressive and that the company runs a high risk of failure. In a report by Muddy Waters’ analyst Carson Block published last week, the firm compared Olam to Enron, the US energy trader that went bankrupt in 2001, and added that it values the Singapore company “on a liquidation basis”.

In its response to that report, Olam noted that its organic capex and M&A plans are both “an outcome of a conscious and deliberate strategy which has been well articulated and constantly refreshed. We have a proven track record of unlocking value through acquisitions and pursuing profitable organic growth”.

The company has also filed a libel suit against the short-selling firm in Singapore.

The fund-raising will deal more directly with the accusations by replenishing Olam’s capital, even if it doesn’t address the claims that its acquisition-focused strategy means it is burning through its cash too quickly. But more importantly, it provides an opportunity to show Temasek’s commitment to the company in a way that a written statement could never do.

In the announcement, Temasek’s senior managing director for investments, David Heng, noted that his firm supports Olam’s publicly known strategy during the past few years to add more upstream and midstream capabilities and capacities. “While no business is without risks, we remain comfortable with Olam’s credit position and longer term prospects, and are pleased to have another opportunity to invest in the company, alongside other shareholders,” he said.

Temasek, which is viewed as one of the most sophisticated and experienced investors in Asia, made its first investment into Olam in 2003, before it became a listed company. Since then it has made three further investments, in 2009 and 2011, accumulating a 16% stake.

Olam referred to the rights issue as “a decisive action ... to further enhance its liquidity position” and said it underscores its ability to continue to access debt and equity capital even in current market conditions.

However, the latest action doesn’t quite correspond with the company’s stern responses to the Muddy Waters report last week.

“Olam faces no risk of insolvency,” it said in a report of its own that called Muddy Waters’ allegations false and misleading. "We have proactively planned for an appropriate capital structure and raised the requisite equity and debt to meet our investment plans. We have sufficient liquidity to pursue our current business as well as future investment plans."

And when asked in an interview with Reuters on Thursday last week when the company was likely to next tap the capital markets, Olam CEO Sunny Verghese said: “Definitely not in the next five to six months.”

The fact that it is now doing exactly that just days later, is likely to raise some question marks. And no doubt, Muddy Waters will take it as a sign that its claims are correct.

The company said it intends to use half of the net proceeds to term out short-term debt and the other half for general corporate purposes, including working capital requirements.

But a rights issue could also put pressure on short-sellers as shareholders who have lent them shares are likely to be calling them back in order to participate in the offering. And perhaps that is one of the motives behind it.

Olam’s share price gained 4.3% on Thursday last week after Verghese’s comments and the company’s dismissal of the accusations that was published the day before. The stock had fallen 14% to a low of S$1.50 last Wednesday since Block first aired his views on Olam at a conference in London on November 19. However, by the close of trading last Friday, it had recovered some of that ground to close at S$1.575. Olam was suspended from Singapore trading yesterday, pending last night’s announcement.

Its bonds have also suffered. According to Reuters, the company’s most liquid issue, due 2017, was quoted at 83.5/84.5 cents on the dollar for a yield of 10% late last week, down from around 96/97 before the Muddy Waters allegations surfaced.

Shareholders will have the right to buy 313 bonds with 162 warrants for every 1,000 existing ordinary shares, according to the announcement. After listing, the warrants can be detached from the bonds and the two instruments can be held and traded separately.

The company will have the right to redeem the bonds in full after two years at a price of 103.375 and after three years at 101.6875. After four years it can redeem the bonds at par.

The number of shares that will be issued if the warrants are exercised in full represents about 16.2% of the existing share capital. The exercise price on the warrants is the US dollar equivalent of Friday’s closing price of S$1.575.

It is unusual to see a rights issue that targets equity investors, but gives them the right to buy bonds, albeit with equity warrants attached. However, a bank noted that the structure is relatively common in Europe and the US. Still, it remains to be seen if existing shareholders are interested, or whether they will take the opportunity to sell their rights in the open market.

The transaction is expected to be completed early next year and will be arranged by Olam’s key relationship banks, Credit Suisse, DBS, HSBC and J.P. Morgan. The four banks will also underwrite the offering in full, but with Temasek’s commitment to sub-underwrite the deal they are actually not taking on any risk. However, the banks have agreed to cover Temasek’s sub-underwriting fee of about $6.375 million.

The final timetable has yet to be determined.

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