Olam International

[d.o.g.]

I think main issue for bondholders like us is the credibility of the issuing companies.
We just want some yield and things erupted all the sudden.

Heard alot of rich retirees bought Olam bonds and got trapped now.

There is a quote in the financial markets that "more money has been lost reaching for yield than at the point of a gun."

Sadly, most individual investors (whether accredited or retail) do not have the knowledge to properly evaluate a company's financial situation. That means that if they wish to invest into stocks or bonds they should either stick to recognized blue chips or find a professional to invest on their behalf.

Olam was clearly not a blue chip, and neither its shares nor its debt would have been suitable for know-nothing investors. Its debt was (and still is) unrated i.e. junk. Real blue chip companies have investment-grade debt i.e. rated at least B. And frankly I would not consider "B" acceptable for a know-nothing investor - probably something rated AA or better would be more appropriate, or maybe only buy AAA-rated government bonds.

For those who say that "safe" bonds pay too little interest, I say: now you understand the meaning of financial repression. Your hard-earned interest has been taken away from you and used to subsidize the undeserving: the multinational banks, Chinese state-owned enterprises, and even entire nations like Greece.

What can you do? You can live with it, or take more risk. But is the increase in risk commensurate with the increase in yield? For those who bought Olam debt, clearly the answer is no. In fact, in today's environment it makes no sense to own bonds at all - anything safe pays too little, and anything paying a decent yield is too risky.

Of course, there are professionals out there buying Greek government debt at 50 cents on the dollar. But that is their job and they do so with their eyes open. Don't try this at home.

As usual, YMMV.

[arthur]

Wise words indeed D.o.g

In fact after this event, I am ever more convinced of Graham's idea of margin of safety as well as companies to possess sound fundamentals.

I believe investing is a lifelong search of knowledge and wisdom. Hopefully many of us will learn more from this chapter of Olam story.

[Musicwhiz]

The Straits Times
www.straitstimes.com
Published on Dec 05, 2012
Rights issue lifts Olam shares but raises debt question
Move could hurt short-sellers; Muddy Waters steps up attack

By aaron low

OLAM International shares rose yesterday after the firm announced a capital-raising exercise but the surprise move has not convinced the doubters.

The initial reaction saw the commodity trader's shares rise by as much as 8.25 per cent in early trading although they closed just 2.5 cents or 1.6 per cent higher at $1.60.

While investors were piling in, short-seller Muddy Waters intensified its assault, saying that the exercise proves its contention that Olam is struggling with debt.

Some local analysts were also unimpressed by the move, with one analyst downgrading his outlook for Olam shares.

Olam's announcement, at a hastily arranged briefing on Monday, that it aims to raise up to US$1.25 billion (S$1.5 billion) in a complex structured rights deal stunned its backers and critics alike.

It involves Olam shareholders subscribing to a rights issue that includes bonds worth US$750 million and warrants worth a further US$500 million.

Shareholders can opt to redeem their warrants after three years and turn them into company stock at a conversion price of $1.575 a share.

Temasek, which holds a 16 per cent stake in Olam, has promised to fully take up its share of rights.

It has also said it will subscribe to all the bonds and warrants that other investors do not take up, a move designed to shore up confidence in the beleaguered company.

But Muddy Waters hit back yesterday, questioning the move and noting that it was a U-turn from Mr Verghese's comments last week that Olam is not looking to raise additional funds for another "five or six months".

"Olam's surprise announcement of an unusually structured US$750 million debt issuance validates our thesis that Olam is in danger of failing," said Muddy Waters.

The firm, which takes short positions on some of the companies that it researches, also noted Mr Verghese said at the briefing that the move was initiated by Olam's lenders and not by the company itself.

"It would not be a good sign if your banks ask your shareholders to lend you more money," said Muddy Waters.

Olam yesterday clarified that the move was initiated by the firm, which asked one of its banks to take an investment opportunity to Temasek.

Temasek made its own independent assessment of the proposal and decided to support it.

Olam added that the banks confirmed there was "no mention of any concern regarding Olam's credit position in their discussions with Temasek".

Local analysts said Olam's move could hurt short-sellers like Muddy Waters.

Short-sellers borrow shares from existing shareholders to sell them and then hope to buy them back at a cheaper price in order to profit from the difference.

In the case of a rights offering such as the one announced by Olam, existing shareholders will need to call back their borrowed stock to participate, said Maybank-Kim Eng analyst James Koh.

This could force short-sellers to buy the shares back earlier, hurting their short-sell strategy.

"However, the management's earlier stance that it could easily survive 12 to 18 months even in a credit market seizure may now sound hollow and minority shareholder confidence may be eroded," he said.

Mr Koh downgraded Olam from a "hold" to a "sell", given the uncertainty.

Said OCBC analyst Carey Wong: "While we think that there could be some near-term boost to its share price, we note that outlook for the next six months remains quite muted."

aaronl@sph.com.sg

[Temperament]

DOG:-

There is a quote in the financial markets that "more money has been lost reaching for yield than at the point of a gun."

Sadly, most individual investors (whether accredited or retail) do not have the knowledge to properly evaluate a company's financial situation. That means that if they wish to invest into stocks or bonds they should either stick to recognized blue chips or find a professional to invest on their behalf.

Dog you are one of the only "Real professionals" who shows you care for the MOM & POP investors. And i think i am qualify for one of them. Why?
i found in the end, i make more money from investing in blue chips and lose a lot of money when i pretend i am a professional trader. That's i KK. So K is alright but not KK. Ha! Ha!

O. K.
Maybe you can't find 2 or 3 baggers in established blue chips most of the time. But who dares to say, "You can't make enough investing in them using the repeatable "Life Cycles (Bear& Bull) of the Market" with your whole life for investing. Market Timing in tune with your whole life. NO? For me it is "$$$enough" to make me carry O&O; until i treat it as one of my "callings in life"
So the Tortoise & the Hare maybe bull shitting you?
But not me O. K. And most in this forum know i started at age 40 till now going to be 65 soon.
Go and try to really understand what WB's 1st and 2nd Rule of Investing. And Johnny Walker still Walking - STRONG.
Shalom.
Amen.

[shanrui_91]

Sorry to hear about your holdings.
Must have been a harrowing two weeks for you where every 1% change is $2500 per lot. That's not a retail investor can normally pictured.

Have you consider selling it or are the bankers advising you to hold on?
I understand from my RM that they are still advising their clients to hold onto Olam bonds.

I think main issue for bondholders like us is the credibility of the issuing companies.
We just want some yield and things erupted all the sudden.

Heard alot of rich retirees bought Olam bonds and got trapped now.

If I may share an observation, (was actively monitoring Olam bonds for past 2 wks for curiosity), last week surge in stock price was not companied by bond price increase.

Perhaps MW allegation of Olam banks withdrawing liquidity may not be too far from truth.

I think Temasek is aware about the numbers of retirees holding onto to Olam bonds and do not wish another Hong Lim park uprising like Lehman Mini-bonds again.

Anyway, I do sincerely hope everything would turns out fine.

Cheers.

I am wondering if there's a misprice between the bond and the shares. It seemed like the market is linking the profitability to the share and the liquidity to the bond. Apparently, should the company fail, bond holder will obviously have a right to any remaining asset (should there be any) before the equity holder. And the company will also be compelled to deliver its bond interest in this situation to avoid a default which will likely spell a huge drop in the share price.

In any case, it seemed like anyone who still wish to go long might want to take a position in the bond instead of the share given the reduced risk. Could there also be a possible arbitrage situation between equity and bond? Of course, the difficulty will be in quantifying the difference between share and debt.

[yeokiwi]

With the current prices that the Olam's bonds are trading, bond issuing to corporate entities and investors is not available to Olam anymore since they might as well buy the current issues.
Banks will not lend to Olam at the moment unless they can get some collaterals in return.
In fact, looking at it, injection of fund by shareholders is probably the only viable route.

In order for their business to go on, they may have to sell away some of their assets (then we will know whether MW is right) or going for another right issue again.

Unless the bond prices recover, Olam will basically have to survive on the current cash on hand + the cashflow from their businesses.

Not a rosy picture for shareholders and bond holders.

[freedom]

it just depends on which is more important, survival or profit.

If Olam chooses survival, it can slowly winding down its working capital to get more cash. It should not be too big a problem with its new right issue as a going concern, but profit sure gets hit big time, loss very likely. This could push its 1 billion profit target for another 5 year.

If Olam chooses profit, oh, boy, it better can find cheap money.

[corydorus]

Frankly i do not understand why the needs to hit S$1B. He is putting his own personal aspiration above shareholders or he has something to hide and timing the Big Bang ?

[d.o.g.]

I am wondering if there's a misprice between the bond and the shares. It seemed like the market is linking the profitability to the share and the liquidity to the bond. Apparently, should the company fail, bond holder will obviously have a right to any remaining asset (should there be any) before the equity holder. And the company will also be compelled to deliver its bond interest in this situation to avoid a default which will likely spell a huge drop in the share price.

In any case, it seemed like anyone who still wish to go long might want to take a position in the bond instead of the share given the reduced risk. Could there also be a possible arbitrage situation between equity and bond? Of course, the difficulty will be in quantifying the difference between share and debt.

If a company's bonds are selling at a meaningful discount to par, there are 2 common reasons:

1. Interest rates have risen, so the bonds' price has fallen to make their yield rise in line with market rates; or

2. The company is in financial distress and bondholders do not expect to fully recover their principal.

#1 is not true today. This is obvious.

If #2 is true then the equity is worthless, since for a bondholder to recover less than his principal, there cannot be anything left for shareholders. In fact this is how "distress investors" operate - they buy the deeply discounted bonds of companies in financial difficulties, then they organize a bondholders' meeting where they enforce their claims, which basically means they wipe out the shareholders and appoint themselves the new shareholders in exchange for extinguishing the debt.

Of course, there is also the game of "chicken" - the creditors will take over the company only if they actually want the assets. In the case of trophy property assets like CK Tang, that is clearly the way to go. In the case of ships, nobody wants to be a shipowner today, which is why FSLT and RMT continue to stay afloat. In a normal market the banks would have seized and sold the ships long ago.

For Olam, it is a bit similar to FSLT and RMT in that its assets are semi-toxic - it's not clear that any of the banks or bondholders actually want to own Olam's assets. Even taking over the assets solely to sell them off would be problematic given the large number of entities in different countries. As Muddy Waters points out, the moment the takeover process begins, the local staff in the far-flung entities will have a huge incentive to fire-sale the assets and disappear with the cash. As such, the shareholders actually have a little bit of room to negotiate - not much, but there is some.

As for arbitrage, there will be professional arbitrageurs at work once the bonds/warrants hit the market. Many hedge funds used to make a good living shorting stocks and holding the convertible bonds. This is known as convertible arbitrage: if the stock goes up, convert the bonds to deliver against the short position, at a small loss. If the stock goes down, the bond usually goes down less, so close out at a profit. Benjamin Graham described this in Security Analysis.

Today, the spreads have narrowed because of intense competition, so convertible arbitrage is only practical for hedge funds able to borrow stock cheaply and who can buy lots of bonds at high gearing ratios. I don't think Olam stock is cheap to borrow any more, and gearing for funds has been limited since Lehman blew up. Again, this is a job for professionals who spend all their waking hours on it - do not try this at home.

[freedom]

I thought that there is something between 1 & 2, such as the financial condition of the company deteriorates(e.g. a downgrade of rating?) such that the original yield does not warrant the risk any more, simply, the investors are asking for higher yield, which result in the decline in bond price. It is not necessary that til the financial condition worsen to "distress", the price will plunge and the yield will jump. Before that, slowly, the price will decline and the yield is rising.

the discount to par is necessarily because the bond holders are not expecting to be paid in full. It could be also that it takes higher yield to hold the bond to maturity(the risk is high, but not necessarily in default).

the same can be said to the premium above par. It is not that bond holders are expecting payout more than par(it will not happen). It is more about the perceived risk is lower.