Olam International

[ozone]

Good to see some recovery in the Prices last week ! But 1.86 should see strong resistant !

[Shrivathsa]

http://www.bloomberg.com/gadfly/articles...ff-promise

Interesting article, and possibly summarizes Olam's problem better than anyone else.

I guess a rights issue is on the way if the borrowing is not rolled over.

Only thing I cannot understand is why they cancelled the bonds if they had so much unsecured debt coming due

[CY09]

It is a sovereign backed company now. With that perceived prestige, olam can obtain loans at low rates and maybe even work with a well known local bank to secure financing.

If olam had been what it was 3 years ago. I would have agreed with bloomberg, but not now seeing who it's owners are.

Olam was able to cancel it's bonds simply due to the ability to secure lower rates from banks given its new status. The bonds were issued when temasek had a much smaller stake

My personal opinion was that it was throwing money to save an investment which was turning sour

[Shrivathsa]

Will that not put pressure on the balance sheet of DBS?

Logically, considering they have already high exposure to Oil and Gas due to Keppel / Sembcorp / Marine, adding Olam will strain even them.

[CY09]

Note i used the word "maybe"

Back to the topic of loans, sometimes companies may borrow short term working lines to sustain their WC and operations. Unfortunately for us, we do not know how much are the interest rates for such short term loans. If you are paying 3% for short term capital (i.e 1 -2 year loan), it is quite good business for banks.

The only downside is the frequency of rolling it over. Hopefully the arranger bank (big brother of the gang of bankers) is ready to help you willingly; otherwise the small members will not help you if big brother pulls out. Many billion dollar bank loans are syndicated loans - banks try to spread their risk among themselves. And often, the willingness of the banks to rollover their loans is by following the lead arranger, if the lead arranger sees you are in a good book and willing, likely you will be helped. And the lead arranger bank not need to have a huge stake in the deal, about 30%-40% is more than sufficient. So whats 30% to a bank who have tens or hundreds billions in loan portfoilo. Furthermore, short term loans have lower Value-At-Risk, pressure on balance sheet may not be that great after all.

[Shrivathsa]

You are probably right cy09. 

Just saw their presentation and they say that against 5 billion short term debt, they have around 7 or 8 billion in un utilised bank credit lines.

This is on slide 27.

[CityFarmer]

I have a previous doubt, what is the optimum level of debt? Gearing (debt-to-equity) was the focus, but I have soon found that, it is a misleading indicator.

In the following scenario

- Asset $1
- Debt/Liabilities $0.9
- Equity $0.1
- Debt-to-Equity 900%

Am I playing with fire? May be. If the asset is having similar if not more liquidity than the liabilities, then it is as safe as fixed depositor, IMO. The best is having cash in well-run bank with %x rate, and debt/liabilities with <x% rate, I can safely pump it up to as close as possible to 10x gearing.

Then what is the optimum for debt? I reckon, the same concept as fund manager, the matching liquidity between asset and liabilities, otherwise, crisis is just a matter of time.

Olam, seems moving up the supply chain, with M&A activities, but funded with long term liabilities i.e. perpetual bonds and equity. It is the right move, IMO.

What do you think?

(not vested)

Commodity trader Olam hunts bolder deals after US$2 bil spree

(Sept 14): Olam International, one of the world’s largest food commodities traders, is targeting more acquisitions next year after a US$2 billion ($2.7 billion) spree since late 2014 involving deals in cocoa, peanuts and wheat.
...
The company’s leverage after issuing perpetual bonds in July is at 1.62 times net debt-to-equity on a pro-forma basis. That’s below its soft target of about 2 times. With net debt of $9.8 billion as of June 30, that would leave the company with a theoretical debt headroom that could be used for everything from dividend payments to capital expenditure, as well as acquisitions.
...
http://www.theedgemarkets.com.sg/sg/arti...-bil-spree

[CY09]

There is no optimum debt. The usage of debt depends on your company's "backers" and the business ability to generate cash to repay debt.

For Olam, it did not go down Noble's path because Temasek put its name behind it. This lowered its interest cost and increase bank's willingness to lend. If Temasek had not acted this way, imo, Olam would have walked Noble's path - asset sale and rights issue

[BlueKelah]

CF optimum debt is no debt or no net debt, but that's just me...

Sent from my MotoG3 using Tapatalk

[Clement]

I have a previous doubt, what is the optimum level of debt? Gearing (debt-to-equity) was the focus, but I have soon found that, it is a misleading indicator.

In the following scenario

- Asset $1
- Debt/Liabilities $0.9
- Equity $0.1
- Debt-to-Equity 900%

Am I playing with fire? May be. If the asset is having similar if not more liquidity than the liabilities, then it is as safe as fixed depositor, IMO. The best is having cash in well-run bank with %x rate, and debt/liabilities with <x% rate, I can safely pump it up to as close as possible to 10x gearing.

Then what is the optimum for debt? I reckon, the same concept as fund manager, the matching liquidity between asset and liabilities, otherwise, crisis is just a matter of time.

Olam, seems moving up the supply chain, with M&A activities, but funded with long term liabilities i.e. perpetual bonds and equity. It is the right move, IMO.

What do you think?

(not vested)

Commodity trader Olam hunts bolder deals after US$2 bil spree

(Sept 14): Olam International, one of the world’s largest food commodities traders, is targeting more acquisitions next year after a US$2 billion ($2.7 billion) spree since late 2014 involving deals in cocoa, peanuts and wheat.
...
The company’s leverage after issuing perpetual bonds in July is at 1.62 times net debt-to-equity on a pro-forma basis. That’s below its soft target of about 2 times. With net debt of $9.8 billion as of June 30, that would leave the company with a theoretical debt headroom that could be used for everything from dividend payments to capital expenditure, as well as acquisitions.
...
http://www.theedgemarkets.com.sg/sg/arti...-bil-spree

I agree with CF. The optimal debt level, assuming well executed cash flow and liquidity matching, depends on the level of certainty in the cash generation ability of the business and its ability to secure debt financing at a low cost.

For trading companies, I think the optimal level of debt is dependent on the sharpe ratio of it's cash returns. High debt levels can be sustainable if the business can generate returns in excess of the cost of debt, with low variance in the returns.