Olam International

[AlphaQuant]

i did some calculations - can someone enlighten me if i had gone wrong.

for every 1000 shares, 313 bonds are issued with 162 warrants, strike price at USD 1.29. so for each bond issued with a face of 1 USD, 0.517 warrants are issued

using a historical stock volatility of 44% and spot of USD 1.29 (so these warrants are struck atms with usdsgd rate of 1.2250), each warrant should be worth ard 50c

for each bond issued at 95c with face 1 USD, 0.517*0.5==0.2585 USD are spent on buying the warrants.

so bond buyer spends 0.95-0.2585=0.6915 USD for a face of 1 USD, which pays 6.75% p.a. (this is not a zero bond)

this works out to be ard 17% for a 5y discounting rate.

is olam's 5y zero bond really trading at 83c to the dollar? it's a very expensive funding exercise if i have not gone wrong...

(disregarding the callable features embedded)

[cfa]

Not his money, so easy say and done.

[FFNow]

From Straits Times

Use shock-and-awe strategy to beat short-sellers
Olam can follow HSBC's tactic: Offer deeply discounted rights issue

Published on Dec 03, 2012
In 2009, HSBC Holdings came under attack by short-sellers and its stock plunged. Without flinching, it went ahead with its rights issue and the move paid off - the bank's share price made a V-shaped recovery. -- PHOTO: ASSOCIATED PRESS


By Goh Eng Yeow Senior Correspondent
WARFARE campaigns on a massive scale are now few and far between, but skirmishes in the financial world are common. Lives may not be lost, but plenty of corporate blood gets spilt.

A new breed of trader has come to prominence in the past few years, building up big short positions in companies and then trying to herd other investors to drive down their share prices - and reaping a big profit.

"Activist" hedge funds, as they are called, provide what some believe to be a valuable service to investors in exposing the dodgy accounting and corruption at emerging-market companies.

Unless a company mounts a successful counter-offensive, it will find the very life of its share price draining away, as panicky banks cut credit lines and suppliers and customers scramble for the exit.

And this can happen whether the accusations made by the marauding short-sellers hold credence or not.

How, then, should a company under attack fight back if it believes it has been unfairly targeted?

The recent global financial crisis offers a few useful lessons companies should heed.

At the height of the crisis in March 2009, HSBC Holdings came under attack by short- sellers, who drove down its share price by 24 per cent in a single day.

This was despite it launching an attractively priced rights issue to raise US$17.7 billion.

It traumatised the regional investment community so much that one popular stock commentator in Hong Kong even broke down and cried on camera as she reported the bank's share price plunge.

As one HSBC old hand observed at the time, hedge funds had sniffed blood when HSBC announced its rights issue, and gone on a coordinated short-selling campaign to spread panic among investors.

But the global lender never flinched from the challenge, and pressed on with its cash call, confident that its vast legion of shareholders would stay loyal and lend it support when it was needed most.

It was a daring gamble that paid off in a spectacular manner, as the bank's share price made a V-shaped recovery.

This forced investors who had lent out their shares to the short-sellers to recall them to subscribe to the rights issue, or face a big dilution of their shareholdings.

The decisive manner in which HSBC beat back the short-sellers also propelled other beleaguered regional lenders sharply higher and enabled markets to stage a resounding recovery.

Now agricultural commodity trader Olam International appears to be facing a similar predicament. It says it is besieged by hedge funds that it claims are using independent research outfit Muddy Waters as a front to raise issues over its business and finances.

No doubt, it has mounted a robust defence, with a point-by- point rebuttal of the issues raised in a 133-page report published by Muddy Waters last week.

But its share price is still trading at about 9.5 per cent below the level it closed before Muddy Waters fired its opening salvo a fortnight ago.

Olam's debts are also showing signs of distress, with buyers only offering 76 cents to the dollar for its perpetuals - a bond-like instrument carrying a 7 per cent coupon.

As IG Markets strategist Justin Harper noted, some mud appears to have stuck, whether Olam likes it or not. So restoring faith among its banks and investors should be the company's top priority.

Olam should take note of what HSBC did during the global financial crisis, namely launching a deeply discounted rights issue to bolster its balance sheet, given the questions raised by Muddy Waters over its finances.

The willingness of Olam's shareholders, especially blue-chip ones like Temasek Holdings, to part with hard cash to pay for the rights issue would offer a more dramatic confidence boost than the utterances of group managing director Sunny Verghese or the defences put up by analysts.

It would also be a much better strategy than buying back shares, which will only burn up the company's much-needed cash.

And like HSBC before it, any rights issue will force the Olam shareholders who had lent out their shares to short-sellers to recall them in order to participate in it, or risk facing dilution.

Actions speak louder than words. A shock-and-awe approach is needed to scare off the short-sellers besieging Olam's gates.

engyeow@sph.com.sg

Isn't this what Olam is going to do? I wonder where this is going to lead to with Temasek backing Olam up... I really hope nothing will happen to our taxpayers' money.

[greengiraffe]

Temasek as a 16% strategic holder is already doing its best to show support for Olam without committing further to lift its stake in Olam.

Look at the structure - US$ bond cum warrant issue. US$ issue that is to be issued on pro-rata basis to Olam holders. Make no mistake - this is no repeat of HSBC capital raising.

Temasek remains committed to Olam. However, it is buying time by only committing as a creditor (subscribing to the proposed US$ bonds with a free option to convert into equity via warrant conversion in the future) for the time being.

As we all know, creditors will get repaid ahead of equity holders during tough times when dividends can be omitted.

Given the mess that MW has created within a short span of time, the ability to raise new debts (no matter how creative it can be) is crucial to Olam as there is a need to convince all financial institutions and potential lenders that they still have the necessary backing of a strategic shareholder.

Once the dust settles and when all financing normalises (time heals all wounds), Olam must demonstrate its ability to sustain its growth strategies. Only then when share prices reflects the above efforts will Temasek exercise the warrants.

Bear in mind the 5 year US$ issue may not be as compelling as the present outstanding debts that Olam has issued. Following the recent MW incidents, there are already huge selloffs in Olam debt papers and Temasek via its under-writing commitments may just end up mopping up a big chunk of the latest financing plans.

Which is why I conclude that Temasek is doing the best it can along the track of HSBC recapitalisation attempts without immediately committing to a new equity injection (that I deemed as a more powerful alternative).

Not vested but actively monitoring for MBA style analysis.

[corydorus]

Isn't MW spot-on in their estimate that Olam has to raise huge amount in near term ?

[pianist]

I wonder whether Temasek had done a better or equivalent research than MW on Olam.
If they had not done it and subsequently committed to further invest in Olam's right issue, it is pure negligence.

Moreover, they are comfortable that Kewalram is not undertaking their right issues.

And I almost choke on my dinner when I read one of the sentences by David Heng's - "we remain comfortable with Olam's credit position.."

i think he always heng heng...
this time round can he heng heng?
btw i read the MW 133 report, their team took full 3 months to chunk the report and findings..realli impressive
but temasek team i think maybe have an even more outstanding research team

[CityFarmer]

The key concern on MW report is the risk of insolvency due to its high gear ratio and the need to refinance in near term. After the support from Temasek Holdings, so no further risk of insolvency, at least not in near term

Other concerns are all old issues which might have already priced-in

In my view, share price will shot up tomorrow.

A very educational saga. Will it the end? or next episode coming...

[cfa]

Price will shot up due to short covering but most likely will drift downward after that.

[VestedInterest]

I think Temasek has no choice but to show support for Olam, or else it is almost a sure loss. MW should have let a sleeping dog lie. Unfortunately he did not learn from his experience with the China companies that had Government backing.
However, if Sunny and Temasek want to win the battle, they will have to go all the way. Anything less will not be enough. It is a high stakes game here which could go either way, IMHO. I guess the side with deeper pockets and who is able to hold out longer will win the battle. The key is winning the confidence of the investors, bankers, bondholders, etc. There will be millions made and millions lost- not sure which side will be which.
Tomorrow's share price movement will give us an idea of the possible outcome. Currently MW is on the offensive while Olam is in the defensive but trying to gain an upper hand by the rights, warrants, etc issue.

[cfa]

MW spends very little and can cause so much stress to OLAM.