Olam 6.75% US$

[valuebuddies]

I have been looking for this sometime already, and have been asking myself why would it trades below par despite having Temasek's support and giving such a good yield? While I do understand about the risk of "non-rating" and the depreciation of USD, but it is still couldn't justify the price if comparing with the rest of bonds in SGX. There must be something I missed out, any buddies here care to clarify?

[felixleong]

this bond was sold at 5% discount to par, it started trading at 95 cents to the dollar

at the current price at about 99 cents, it has gone up a bit already as did the rest of the locally listed bonds like CMA 3.8% and Genting 5.125%

Cheers ^^

[countonme]

Could be the risk associated with Olam. Still highly leverage and Temasek may exit when the time is right.

[l0nEr]

I have been looking for this sometime already, and have been asking myself why would it trades below par despite having Temasek's support and giving such a good yield? While I do understand about the risk of "non-rating" and the depreciation of USD, but it is still couldn't justify the price if comparing with the rest of bonds in SGX. There must be something I missed out, any buddies here care to clarify?

USD bonds trade differently from the SGD bonds. Part of is because its priced off the US treasury curve. UST have been rather volatile over the past few weeks/months due to the tapering concerns and also the "fiscal cliff" saga. Another part of it is due to the amount of liquidity and local support. As a Singapore retail traded bond, the targeted market would most likely be local investors, which would not like to take on the currency risk. On the other hand, foreign investors or institutional investors would not want to buy it because there are more attractive USD bonds out there. Hence, there probably isnt much a "natural" market for the bond. Price is still a result of supply and demand.

On specific credit issue, bond investors do not exactly consider the "implicit support from Temasek as credible. I dont know why but the market doesnt really have much regard for Temasek's stake. lol. They are probably seen more business minded, and have a more hands-free management policy over its investments (except DBS and Olam now)? Moreover, Olam does not operate in a 'strategic' industry to Singapore.
Consider this, although CapitaLand and NOL are government linked, they also do no not command similar yields to Temasek (closer to a BBB than an AAA). NOL trades a lot wider than Capitaland too. If this is the case for them despite the years of shareholdings and support, what more for Olam, which was never considered as "strategic".
Finally, bond investors dont like asset light companies, mainly because when it defaults, you get nothing back. Property companies are the best because you get the property.

[felixleong]

do note that Olam has a very high gearing
the bonds are also not rated

high yield high risk~

[valuebuddies]

I think you guys are more concerned about the risk of default in case of any bad events happen, this is why I only interested in its bond rather than share for higher security. Will wait for USD to get weaker a bit before enter, anyone vested here?

[sgd]

I think you guys are more concerned about the risk of default in case of any bad events happen, this is why I only interested in its bond rather than share for higher security. Will wait for USD to get weaker a bit before enter, anyone vested here?

you mean bond market prices fall.

if interest rates goes up USD is going to get stronger but bond prices usually will fall when interest rates goes up.

but if interest rates go up $8.5 billion debt is going get expensive.

I read that as bond holder they need to pay bond coupons first before any dividends and in event of bust bond holders gets first claim to whatever money is left.

But bondholders have zero voting rights at agm, long before they go bust they can conduct an agm to vote against paying bond holders.

http://infopub.sgx.com/FileOpen/14Nov201...eID=264338

[valuebuddies]

Bondholders has priority over the equity owners, at least if a company goes into liquidation, bondholders will be paid before the shareholders. For the case of Olam, I don't foresee it will go into this extend though it is highly geared, the company still making profits.

[sgd]

I did some simple calculation. Please correct/excuse me for any errs.

if ttl long term & short term debt is ard 8.5 billion and finance cost from fy2013 is $518,353,000 means interest is abt 6% ?

coy issue 750mil bonds at 6.75% means coupon to pay is $50,625,000/yr

this 50.6 mil will affect P/L going forward?

Also if interest rates go up by quarter pct or 25 basis points

8.5bil x 0.0025 = $21.2 mil

net profit avg ard 350 mil/yr so going forward additional fin cost 50-70 mil will lower profit unless they can earn more.

npt 350 mil on back of 20bil of business is 1.75% not much room to maneuver.

npt 350mil included 96 mil fair value gain on assets

what happens if there is downturn?

[valuebuddies]

I did some simple calculation. Please correct/excuse me for any errs.

if ttl long term & short term debt is ard 8.5 billion and finance cost from fy2013 is $518,353,000 means interest is abt 6% ?

coy issue 750mil bonds at 6.75% means coupon to pay is $50,625,000/yr

this 50.6 mil will affect P/L going forward?

Also if interest rates go up by quarter pct or 25 basis points

8.5bil x 0.0025 = $21.2 mil

net profit avg ard 350 mil/yr so going forward additional fin cost 50-70 mil will lower profit unless they can earn more.

npt 350 mil on back of 20bil of business is 1.75% not much room to maneuver.

npt 350mil included 96 mil fair value gain on assets

what happens if there is downturn?

I got you, it is indeed a risky play but it offer a good yield. I am not really concerned on whether Olam can continue to make profits, I am only concerned on whether it will pay the 6.75% coupon, and most importantly whether it will redeem the bond at least at par regardless of boom or doom days. I am prepare to hold the bond till maturity anyway. To answer your last question, hopefully Temasek will pump in more money .