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06-12-2012, 07:40 AM
The Straits Times
www.straitstimes.com
Published on Dec 06, 2012
News Analysis
What's the deal behind Olam's rights issue?
Capital-raising exercise looks like a good deal, but raises more questions
By aaron low
AT FIRST glance, Olam International's capital-raising exercise is a pretty sweet deal for investors.
The rights issue is a complex structured deal that allows investors the right to subscribe to a bond offering that has warrants attached.
For every 1,000 shares an investor holds, he can subscribe to 313 bonds, which come with 162 warrants. The total outlay will be $363.
The five-year bond itself will pay an interest of 6.75 per cent. But because it is being priced at 95 per cent to its face value of US$1 (S$1.21), its effective interest rate is actually about 8 per cent.
The warrants can be converted into Olam shares at the conversion price of $1.575 but only after a period of three years. The value of these warrants, which can be traded over the exchange, are a bit trickier to estimate. They become valuable only if Olam shares trade above $1.575.
One indicator of future price performance is to see where analysts think Olam and its share price are headed. According to Bloomberg, the average analyst target price for Olam is about $2.06.
Using rough calculations, this means that each warrant is worth about 48 cents. In other words, investors subscribing to the rights issue are getting both 8 per cent coupon bonds worth $381 as well as warrants potentially worth $78. All this for $363.
On top of that, the entire exercise is meant to shore up confidence in Olam, which has been under fire from short-seller Muddy Waters raising questions about the firm's acquisitions and debt levels.
The rights issue will raise about US$1.25 billion for the embattled commodities trader, which has seen its share price fall by about 12 per cent since the first Muddy Waters salvo was fired at Olam.
Temasek Holdings has said that it is committed to taking up its share of the rights but that it will also mop up whatever bonds and warrants not subscribed by other Olam shareholders. This is Temasek's way of telling the market that it has full confidence in Olam, in which it first invested in 2003, way before the company was listed in 2005.
"We view this as a clear indication of Temasek's support of and confidence in Olam," said Standard Chartered analyst Adrian Foulger.
So why have Olam shares continued to flounder, falling 5.31 per cent to $1.515 yesterday?
The simple truth is that the rights issue has raised more questions than answers.
First, there are many niggling questions over how the issue itself was first conceived.
As late as last Thursday, Olam chief executive Sunny Verghese was telling the media that he was not looking to raise more debt.
He even bought one million Olam shares on Friday to show his full confidence in his own firm.
Then on Monday evening, in a hastily assembled press conference, Olam announced the deal to raise more debt.
Mr Verghese said that it was the company's banks that went to Temasek to propose the rights deal. Temasek then approached Olam, he said.
But this sequence was clarified in another statement sent out by Olam on Tuesday, that stated that it was Olam which had instructed one of its banks to go to Temasek to discuss the investment deal.
The confusion is adding uncertainty to the mix, and the market is clearly reacting very poorly.
The other more fundamental question is why is Olam even raising more debt in the first place?
On more than one occasion Mr Verghese has said that the firm has $10 billion in liquidity.
His attempts to soothe investors by emphasising that the latest rights issue is aimed at reducing the stress levels in the bond market as well as adding "additional liquidity" is becoming less convincing.
For one thing, why does it need to raise more expensive debt to pay off cheaper debt due next year? Could it not have drawn on its credit lines to repay that debt?
Highly leveraged companies like Olam cannot afford to lose its investors' and lenders' trust and faith.
It has been two weeks since Muddy Waters opened its guns on Olam and for all the defiance the firm has displayed, it does feel as if the market is losing confidence in it, given the falling share price.
What the bond and warrants issue has given Olam is the most precious commodity of all - time.
Olam embarked on an acquisition spree over the past three years, making cumulative capital expenditure investments that had hit US$4.4 billion for the financial year ended June 30.
The capital injection that will be generated by the new rights issue should give Olam about a year to digest these acquisitions. This might mean phasing out some planned investments or even selling off some assets to strengthen its balance sheet.
It will also need to start showing positive cash flow earlier than the 2015 target Olam had set itself. If not, the market will start questioning again how the firm will pay for all the debt that it has accumulated.
If that comes to pass, the sweet deal could become very bitter indeed.
aaronl@sph.com.sg
--------------------------------------
The Straits Times
www.straitstimes.com
Published on Dec 06, 2012
Olam bond prices perk up, but shares take a beating
By Goh Eng Yeow Senior Correspondent
OLAM International appears to have partly stabilised the prices of the bonds it had issued, though its shares were hammered yesterday.
The stock fell 8.5 cents, or 5.31 per cent, to $1.515 after rising as high as $1.71 on Tuesday after it unveiled a rights issue that could raise up to US$1.25 billion (S$1.5 billion) for its balance sheet.
But its bonds have rallied sharply, after hitting all-time lows last week amid fears over the company ignited by short-sell research outfit Muddy Waters.
Olam bond yields had soared to between 10 per cent and 14 per cent, as bond investors scrambled for the exit. Increasing yields, besides meaning higher payouts by Olam, indicate that the market sees the company as a riskier bet.
The rights issue announced on Monday night went some way towards addressing that issue. For every 1,000 Olam shares, a shareholder can subscribe to 313 bonds with a par value of US$1 at an issue price of 95 US cents, which come with 162 warrants.
As the bonds carry a coupon of 6.75 per cent, this gives it an effective yield of 8.1 per cent.
Maybank Kim Eng analyst James Koh said in a note that setting an effective yield of 8.1 per cent for the new bonds may signal the Olam management's intention to try to bring down the high yields on bonds already out in the debt market. If so, Olam appears to be succeeding.
Yesterday, its US$500 million bonds that mature in 2017 and have a coupon rate of 5.75 per cent were traded at a yield of 8.45 per cent, down from 10.03 per cent last Friday.
Yields for other Olam bonds have fallen to around 8.35 per cent to 8.7 per cent, indicating confidence in the company among bond investors has improved.
Even the stress on the perpetual bonds, which were issued at par with a 7 per cent coupon early this year, has subsided.
They fell to a record low of 75.439 cents to the dollar last Thursday, making a yield of 14.67 per cent, showed Bloomberg data. By yesterday they had recovered to 84.94 cents to the dollar, with yield falling to 11.61 per cent.
The recovery would have addressed at least one of the concerns raised by chief executive Sunny Verghese at his briefing on Monday to announce the rights issue. He noted then that the objective of the exercise was to relieve pressure on the share price created by short-sellers and pressure on the bonds side.
engyeow@sph.com.sg
www.straitstimes.com
Published on Dec 06, 2012
News Analysis
What's the deal behind Olam's rights issue?
Capital-raising exercise looks like a good deal, but raises more questions
By aaron low
AT FIRST glance, Olam International's capital-raising exercise is a pretty sweet deal for investors.
The rights issue is a complex structured deal that allows investors the right to subscribe to a bond offering that has warrants attached.
For every 1,000 shares an investor holds, he can subscribe to 313 bonds, which come with 162 warrants. The total outlay will be $363.
The five-year bond itself will pay an interest of 6.75 per cent. But because it is being priced at 95 per cent to its face value of US$1 (S$1.21), its effective interest rate is actually about 8 per cent.
The warrants can be converted into Olam shares at the conversion price of $1.575 but only after a period of three years. The value of these warrants, which can be traded over the exchange, are a bit trickier to estimate. They become valuable only if Olam shares trade above $1.575.
One indicator of future price performance is to see where analysts think Olam and its share price are headed. According to Bloomberg, the average analyst target price for Olam is about $2.06.
Using rough calculations, this means that each warrant is worth about 48 cents. In other words, investors subscribing to the rights issue are getting both 8 per cent coupon bonds worth $381 as well as warrants potentially worth $78. All this for $363.
On top of that, the entire exercise is meant to shore up confidence in Olam, which has been under fire from short-seller Muddy Waters raising questions about the firm's acquisitions and debt levels.
The rights issue will raise about US$1.25 billion for the embattled commodities trader, which has seen its share price fall by about 12 per cent since the first Muddy Waters salvo was fired at Olam.
Temasek Holdings has said that it is committed to taking up its share of the rights but that it will also mop up whatever bonds and warrants not subscribed by other Olam shareholders. This is Temasek's way of telling the market that it has full confidence in Olam, in which it first invested in 2003, way before the company was listed in 2005.
"We view this as a clear indication of Temasek's support of and confidence in Olam," said Standard Chartered analyst Adrian Foulger.
So why have Olam shares continued to flounder, falling 5.31 per cent to $1.515 yesterday?
The simple truth is that the rights issue has raised more questions than answers.
First, there are many niggling questions over how the issue itself was first conceived.
As late as last Thursday, Olam chief executive Sunny Verghese was telling the media that he was not looking to raise more debt.
He even bought one million Olam shares on Friday to show his full confidence in his own firm.
Then on Monday evening, in a hastily assembled press conference, Olam announced the deal to raise more debt.
Mr Verghese said that it was the company's banks that went to Temasek to propose the rights deal. Temasek then approached Olam, he said.
But this sequence was clarified in another statement sent out by Olam on Tuesday, that stated that it was Olam which had instructed one of its banks to go to Temasek to discuss the investment deal.
The confusion is adding uncertainty to the mix, and the market is clearly reacting very poorly.
The other more fundamental question is why is Olam even raising more debt in the first place?
On more than one occasion Mr Verghese has said that the firm has $10 billion in liquidity.
His attempts to soothe investors by emphasising that the latest rights issue is aimed at reducing the stress levels in the bond market as well as adding "additional liquidity" is becoming less convincing.
For one thing, why does it need to raise more expensive debt to pay off cheaper debt due next year? Could it not have drawn on its credit lines to repay that debt?
Highly leveraged companies like Olam cannot afford to lose its investors' and lenders' trust and faith.
It has been two weeks since Muddy Waters opened its guns on Olam and for all the defiance the firm has displayed, it does feel as if the market is losing confidence in it, given the falling share price.
What the bond and warrants issue has given Olam is the most precious commodity of all - time.
Olam embarked on an acquisition spree over the past three years, making cumulative capital expenditure investments that had hit US$4.4 billion for the financial year ended June 30.
The capital injection that will be generated by the new rights issue should give Olam about a year to digest these acquisitions. This might mean phasing out some planned investments or even selling off some assets to strengthen its balance sheet.
It will also need to start showing positive cash flow earlier than the 2015 target Olam had set itself. If not, the market will start questioning again how the firm will pay for all the debt that it has accumulated.
If that comes to pass, the sweet deal could become very bitter indeed.
aaronl@sph.com.sg
--------------------------------------
The Straits Times
www.straitstimes.com
Published on Dec 06, 2012
Olam bond prices perk up, but shares take a beating
By Goh Eng Yeow Senior Correspondent
OLAM International appears to have partly stabilised the prices of the bonds it had issued, though its shares were hammered yesterday.
The stock fell 8.5 cents, or 5.31 per cent, to $1.515 after rising as high as $1.71 on Tuesday after it unveiled a rights issue that could raise up to US$1.25 billion (S$1.5 billion) for its balance sheet.
But its bonds have rallied sharply, after hitting all-time lows last week amid fears over the company ignited by short-sell research outfit Muddy Waters.
Olam bond yields had soared to between 10 per cent and 14 per cent, as bond investors scrambled for the exit. Increasing yields, besides meaning higher payouts by Olam, indicate that the market sees the company as a riskier bet.
The rights issue announced on Monday night went some way towards addressing that issue. For every 1,000 Olam shares, a shareholder can subscribe to 313 bonds with a par value of US$1 at an issue price of 95 US cents, which come with 162 warrants.
As the bonds carry a coupon of 6.75 per cent, this gives it an effective yield of 8.1 per cent.
Maybank Kim Eng analyst James Koh said in a note that setting an effective yield of 8.1 per cent for the new bonds may signal the Olam management's intention to try to bring down the high yields on bonds already out in the debt market. If so, Olam appears to be succeeding.
Yesterday, its US$500 million bonds that mature in 2017 and have a coupon rate of 5.75 per cent were traded at a yield of 8.45 per cent, down from 10.03 per cent last Friday.
Yields for other Olam bonds have fallen to around 8.35 per cent to 8.7 per cent, indicating confidence in the company among bond investors has improved.
Even the stress on the perpetual bonds, which were issued at par with a 7 per cent coupon early this year, has subsided.
They fell to a record low of 75.439 cents to the dollar last Thursday, making a yield of 14.67 per cent, showed Bloomberg data. By yesterday they had recovered to 84.94 cents to the dollar, with yield falling to 11.61 per cent.
The recovery would have addressed at least one of the concerns raised by chief executive Sunny Verghese at his briefing on Monday to announce the rights issue. He noted then that the objective of the exercise was to relieve pressure on the share price created by short-sellers and pressure on the bonds side.
engyeow@sph.com.sg
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