Olam International

Olam bonds maturing in 2018 are currently trading at US$0.946 with coupon rate of 6.75%. This translates to a simple yield in excess of 8% p.a (factoring in capital gains) till maturity. I guess forex risk is an issue since USD / SGD rates has not been stable.

Any buddies purchasing some of this fixed income security ?

(Not Vested)

Just called my broker to place an order for it, he gave me the following information



The bonds and warrants will be listed, quoted and traded on the Main Board of the SGX-ST from 9.00am on 31 Jan 2013. For purpose of trading on SGX-ST, each board lot of the
bonds will comprise US$1,000 in principal amount, while each board lot of warrants will consist of 1,000 warrants.

However, Olam has applied and gotten SGX approval for temporary counters to trade the bonds in board lots of US$100 in principal amount and the warrants in board lots of 100 warrants for a 1-month period.

---

warrants at 25c bonds at 94c+
seems like easy profits for temasek, LOL

Anyone knows how to price the warrant? the exercise price is $1.575, current price is $1.645 but warrant pricing at 0.25.

The 5 years premium seem steep to me

warrant very hard to price, got factors such as

1) time value of money
2) volatility
3) strike price
4) expiry date

If you pro, can use black-scholes model to do you own calculations ba

(31-01-2013, 11:45 AM)2V. Wrote: Anyone knows how to price the warrant? the exercise price is $1.575, current price is $1.645 but warrant pricing at 0.25.

The 5 years premium seem steep to me

Warrants are almost similar to options except that warrants is the right to purchase new shares from the company (i.e. overall outstanding shares increase) while option is just the right to purchase current outstanding shares from another stakeholder.

Warrants act somewhat like leveraging and can be a better investment alternative if you are confident of the company's prospects. You should take note of one key aspect - gearing. For instance, given a 1-for-1 conversion warrant for Company A of which the warrant is priced at $1 with exercise price $1 for the underlying share which is priced at $2. Assume the company price increased by 50c which implies a 25% increase, buying the warrant will enjoy a 50% increase instead.

Of course, that's the perk but leveraging cuts both way and a warrant can be deemed worthless if it's very close to its maturity and it is highly out of the money (i.e. in losses).

IIRC, the valuation in Michael Dee's article is approx 50 cents for the warrants. It seems Mr Market values it with 50% discount

Published January 31, 2013
Trading in Olam's bonds and warrants: some points to note
By R Sivanithy

SOME US$750 million worth of Olam International bonds and just over 387 million Olam warrants will commence trading today, and for those who have followed Olam's fortunes over the past two months, the performance of these instruments will be closely watched for clues on how the market currently views Olam, given the hard questions asked of the company by short-seller Muddy Waters in November last year.

On the one hand, Singapore investment company Temasek Holdings has thrown its weight solidly behind Olam, increasing its stake in the commodities firm to 20 per cent and fully taking up its rights entitlement. These are moves which should help boost investor confidence that might have been shaken following the Muddy Waters attack. Meanwhile, Olam itself has also said the rights issue was necessary to restore investor confidence.

On the other hand, however, are unanswered questions which have been raised by analysts and other observers that, if allowed to stay unaddressed, will hinder any recovery in the share price. Even with Temasek's reassuring presence that has helped push the price up from the recent low of $1.40, Olam's shares are still languishing at $1.65, below the $2 level they traded at in October.

First though, some thoughts on near-term pricing, starting with the bond. This has already been trading over-the-counter and according to Bloomberg, the bid-ask is 94.37-95.33. At these prices the yield is just over 8 per cent, so investors interested in the bond should ask themselves if this is sufficient compensation for a) the US dollar currency risk and b) a bond that has not been independently rated by any external ratings agency. More on this later.

Next, the warrants. Much depends here on the assumptions one makes about the future, particularly volatility. When the nil-paid rights were trading and the shares were at $1.68, we input a volatility figure of 25 per cent into Bloomberg's warrant calculator to value the warrant at about 18 US cents.

Bloomberg, however, gives a historic figure of 40 per cent in its calculator and if this is deemed more appropriate - arguably it is because it takes into account the most recent history, even if that history was unduly influenced by large-scale short-selling - using this figure in the calculator gives a warrant value of about 31 US cents.

If, however, an in-between volatility figure of 30 per cent is preferred and using a dividend yield of 2.4 per cent and a 5 per cent cost of borrowing Olam's shares which were also used in our earlier estimates, we estimate the warrant to be worth 21 US cents.

The performance of the bonds and warrants over time, however, will depend on how the market views Olam's fundamentals and outlook. In its releases over the past two months, the company has addressed concerns raised by Muddy Waters concerning Olam's accounting for biological assets, strategies, leverage and overall business model. However, it has remained silent on two important issues which should be tackled as soon as possible.

First is the question of a bond rating. The present issue was not rated, which means the local investing public soaked up US$750 million worth of bonds - a very large sum by any measure - without any independent party providing guidance on the quality of the issue.

Since Olam has said the rights exercise was originally motivated to instill investor confidence via a demonstration of the company's access to capital markets, obtaining a positive rating from a ratings agency like Moody's or S&P should complement this motive as it will provide the market with even greater confidence in Olam's financial standing.

Second, the pledging of management shares as collateral which Olam has refused to discuss because it believes it to be a private matter.

The Singapore Institute of Directors' (SID) Statement of Good Practice (SGP) 12/2011 recommends that directors exercise prudence when pledging shares, especially so where controlling shareholders are involved. It states: "Any margin call or foreclosure on their pledged shares may have an adverse impact on the financial position of the listed company and may affect its liquidity and cash-flow position."

It is not known how many shares, if any, have been pledged by Olam's senior management. The company, however, has been open and transparent about its financials, strategy and business model ever since coming under heightened scrutiny following Muddy Waters' allegations. It should therefore extend this transparency to senior management share pledges.

After all, in a disclosure-based regime as is practised here, the best policy is that when in doubt, disclose.

Temasek Holdings continue to increase its stake on Olam, to 21% base on latest update. Temasek has became the largest winner in the MW saga IMO.

http://info.sgx.com/webcoranncatth.nsf/V...C000B0423/$file/08Feb2013-InterestChange-Form3_TH.pdf?openelement

And yet another report from Muddy Waters today.
The two gentlemen, Mr. Verghese and Block should just go into a boxing ring to rough it out to spare all concerned investors headaches.

Muddy Waters’s Reaction to Olam Q2 2013 Report

As discussed previously, Temasek has drawn the line. And assuming there's no fraud, Olam can improve cash flow just by reducing working capital, which seems to be what they are doing.

MW is toast.

But the more interesting observation remains: are the warrants a cost to the company? or a cost to the shareholders since it is now in the money? Heretic but finance 101 may not be the answer.