Olam 6.75% US$

[felixleong]

Olam is a very difficult company to understand

Warren buffett once said "however, we’ve done better by avoiding dragons than by slaying them."

for value investors, I think this is a company to avoid investing in, be it equities or bonds

There are really many other companies listed on the sgx which have simpler business, better moat and higher margin of safety ^^

[sgd]

had a slow evening yesterday just playing with calculator and drinking some delicious rum found some strange results.

for instance if net profit 350mil is just 1.75% margin of 20billion revenue that means for every $1 net profit they have to do $57.14 of business.

So to cover the 50mil extra cost for the bonds they need to earn more so X $57.14 = $2.8 billion worth of extra business a year

and this strange thing, the 750mil at 6.75% what purpose did they raise it for? becos if we div that by $57.14 only gives around $13 mil net profit but pay $50mil for coupons.

I must be getting it wrong some how, better don't drink rum while playing with calculator =)

[felixleong]

Olam is like a whale, it needs to eat a lot via debt and rights or placement. Its businesses doesnt generate much free cash flow and their earnings are manipulated by negative good will gains, muddy water research report covers all these points in detail.

[valuebuddies]

I just would like to find out more regarding the impact of Temasek takeover on Olam bonds. It is currently traded at 104.8 but if Olam were to redeem earlier, the bond holder would be paid more than this. And even if the bonds will not be redeemed until maturity date, it is still fine because of Temasek's assurance. What also puzzle me is that if Olam to be delisted, will the bonds be delisted as well? If yes, then how would the bond holders dispose them before maturity?

[tanjm]

I doubled my stake on the day that this deal was announced, and I'm sitting on a paper gain. But I intend to hold till maturity so delisting theoretically doesn't concern me. The bonds are obligations by Olam to bondholders. I haven't looked but I doubt that listing status is a condition and even if so, see below.

Having said that, the F&N episode shows that corporations can play games with the rules. In that particular case, a technical default (with forced redemption at par) was the threat brought to the table to get bondholders to agree to sell back bonds. In this case, i believe the same trick can't be tried and in any case it would be reputationally negative for Temasek.

So overall I'm happy to hold on till maturity. If Temasek/olam want to buy back the bonds, I'll be happy to consider. However my private estimate of the fair value of this bond may be around 110. It would be worth even more than 110 to me if Temasek really takes over and delists Olam.

[sgd]

for it to go from 104.8 to 110 and abv usually interest rates need to go down.

interest rates are now near zer0 and will probably go up under the current new Fed chief

You are a stockbroker do you think 110 will still happen if interest rates goes up?

[safetyfirst]

must know how to discount the coupon rate la!

[InvestArk]

The bonds should be more or less quite stable due to the backing of temasek holdings. This would also present an opportunity for investors whom had earlier invested in either the company itself or the bond an exit avenue if they believe that olam is still fundamentally unsound. For investors that believes that Olam is still on track to deliver its previously stipulated targets then the advent of temasek holdings should be a big boost of confidence. (you have the big boys behind u)

If rates continue to stay low (or delays in rates hikes by the new fed chief) than the appreciation of the bond will be a very likely scenario.

However, my opinion is do try to focus back on the fundamentals of an investment rather than the speculative part of it (e.g will the rates go up/down and when?) as no one would really know.

[tanjm]

for it to go from 104.8 to 110 and abv usually interest rates need to go down.

interest rates are now near zer0 and will probably go up under the current new Fed chief

You are a stockbroker do you think 110 will still happen if interest rates goes up?

and

The bonds should be more or less quite stable due to the backing of temasek holdings. This would also present an opportunity for investors whom had earlier invested in either the company itself or the bond an exit avenue if they believe that olam is still fundamentally unsound. For investors that believes that Olam is still on track to deliver its previously stipulated targets then the advent of temasek holdings should be a big boost of confidence. (you have the big boys behind u)

If rates continue to stay low (or delays in rates hikes by the new fed chief) than the appreciation of the bond will be a very likely scenario.

However, my opinion is do try to focus back on the fundamentals of an investment rather than the speculative part of it (e.g will the rates go up/down and when?) as no one would really know.

A bond's yield to maturity will generally be composed of 2 components. The riskless yield and the risky yield. Temasek's yield will be close to riskless and therefore the USD libor swap curve (e.g. 2% at 5Y). Olam's yield before the news was 7+%. In other words, Olam's yield fell into the "high yield" or "junk bond" category.

So, if Temasek is seen to be backstopping Olam's debt, then Olam's bond yields should go lower toward's Temasek's yield and therefore the price higher (all things being equal - there is no need to talk about direction of interest rates aka riskless yield).

At a price of 110, Olam's bond yield is 4.16%. Still higher than Capitamall's yield for example (at about 2.8%). In fact, if Olam's yield were to drop to 2.8%, the price would be 115.

Yes, it is possible that interest rates will rise, compressing yields. But given Olam's yield gap against riskless was >500bp before this current deal - that's a lot of buffer against a rate rise. In other words, at the moment, the credit worthiness of Olam is more important than a possible rate increase.

[touzi]

At a price of 110, Olam's bond yield is 4.16%.

I have some bond newbie questions.

- When are the dividends paid? I know it is semi-annual, is the first payment already done for this year?

- The last traded price of 1.049 is USD ?

- I presume when you said 110 you are referring to $1.10? To calculate the yield, isn't it just 6.75/110 ? How did you get 4.16%?

Thank you.