Olam International

[freedom]

to say that there is no cost(beside underwriting fee etc) is not so right. There is hidden cost. As a company continues to ask for money from shareholders, shareholders will shun the company; eventually, it would be difficult for the company to raise any money from the market.

It is costly for Olam to have a right issue of equity. for one, the issue price probably would be low, so it is expensive.(There is always cost to issue equity. The company loses when it sells itself for a cheaper price than its valuation); for another, Olam probably does not need additional equity to be a going concern.

[specuvestor]

^^ Yes that is THE key. You NEED access to the capital markets. For a company with cash, it is irrelevant. The REAL cost is on the shareholders... NOT the company.

As long as the issue price is below the company's intrinsic value, it is negative for minority shareholders. Conversely is true for share buyback. Go listen to FNN EGM when the chairman say it is irrelevant what price FNN buy back the shares. It is only an accounting entry. That is not true and the market recognises that.

The bond will cost the company 8% in bond interest, and 5% more on warrants with a depressed strike price (decoded from Michael Dee's article). This is even for those shareholder exercise their warrants, and without dilution on their holding.

The 5% is based on the black sholes calculation. it has nothing to do with the discount on intrinsic value, which I already addressed earlier.

Put in another way: What is the cashflow cost to the company if say the stock price ended below the strike price on expiry? As the CFO would you be worried? You would only be worried if you need the money to pay the debt repayment... you wouldn't even think the warrant cost money.

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I think there are a few misconceptions here:
1) equity repaying bond is NOT shareholder paying shareholder. It is not right pocket to left pocket. More like the left pocket has a hole ie dilution
2) The real cost of the warrant is not present price or future price of the warrant. It is the strike price. Is this strike price close to the intrinsic value of the company for shareholders to be diluted?
3) the real cost to the company is different from 1) the cost to shareholders and different from 2) the PRICE based on black scholes. Obviously this is not the teaching of standard finance 101. From Buffet's point of view when he did the 10 years S&P puts, the price of the option is actuarial, the cost of the option is fundamental. I would say the real cost to a company issuing options or warrants is ZERO, assuming the shareholders are daft.

Some comments
1) I'm talking from the company's point of view. For them it's really shareholders paying shareholders if they decided to have shares placement to replace this bond issue. My point was that their cost of borrowing can be even lower than the 8% that the public perceived. Of course, if we are looking as a shareholder, we will get dilution.

2) Will shareholders really get diluted if they subscribed to the rights? For those that did, they won't get dilution, but those that didn't due to whatever reason will..

3) Yea, my initial point is that Olam as a company didn't lose out that much in this deal. Like you say, zero cost for them for the warrants. The major downside is that they lose on minority shareholders' confidence, since the deal is structured to the advantage of Temasek and the other major shareholders that decide to that up the rights issues.

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if in the future when the warrant can be exercised, Olam is worth significantly more, it will be bad for Olam's financial performance because they sold their warrants today cheap. The dilution to earning is larger.

This is a good point. You are referring to EPS being calculated on an enlarged shares pool right? Thus making EPS growth (if there's a growth) looks lesser than it is and affecting overall shares price as a result?

1) bond holders are not shareholders. They are intrinsically, academically and practically different. The company also view shareholders and bond holders differently. As long as you pay interest and subsequently principal, the bond holders don't disturb you. Shareholders are much more cumbersome

The rights issue is for both bonds and warrants. You may be confused.

2) technically true. But please read my caveat on the previous post.

3) There is a difference between the company and shareholders. And yes the warrant is zero cost to the company, but not so to the shareholders.

Your last statement is essentially the key to understanding how a professionally managed company would dilute itself. Let's imagine a partnership. Why would you get someone else in as a partner? Because you think the new guy will deliver more than what cost you as a current partner ie you will get less of the pie as a %, but the pie will be bigger and you will GAIN MORE THAN LOSE. That is why Buffett always look at his shareholders as partners.

[d.o.g.]

Moving on, for the company in the next few years, the actual financial cost is 6.75% only, and during the bond maturity, the company can have the option to do a rights or shares placement to repay these bonds if they and the shareholders want to.

The cost is not 6.75% because (1) the bond is issued at 95% instead of par; and (2) there are free warrants being given.

Even if we ignore the warrants and pretend that the amount due at maturity is only 95% and not par, the cost would already be 6.75/95 = 7.1%. But because the bond matures at par, there is an additional 5% due after 5 years. This extra interest is merely deferred, it is still payable. It amounts to about 1% per year (not exact due to compounding). So the ongoing cash cost is 7.1%, while the accounting cost is about 8% before factoring in the warrants.

Deferred interest still costs money in the end, it is simply a way for a borrower to delay cash outflows.

[zxiank]

Moving on, for the company in the next few years, the actual financial cost is 6.75% only, and during the bond maturity, the company can have the option to do a rights or shares placement to repay these bonds if they and the shareholders want to.

The cost is not 6.75% because (1) the bond is issued at 95% instead of par; and (2) there are free warrants being given.

Even if we ignore the warrants and pretend that the amount due at maturity is only 95% and not par, the cost would already be 6.75/95 = 7.1%. But because the bond matures at par, there is an additional 5% due after 5 years. This extra interest is merely deferred, it is still payable. It amounts to about 1% per year (not exact due to compounding). So the ongoing cash cost is 7.1%, while the accounting cost is about 8% before factoring in the warrants.

Deferred interest still costs money in the end, it is simply a way for a borrower to delay cash outflows.

Hi,

Yes, I understand about 1) and 2). However, I'm talking about it in real $$ term for the next 5 years. ie: for the next 5 years before the bond matures, Olam needs to pay only the 6.75% interest. Nothing more. The "extra yield" that the bond holders will get will only come in the end of the 5 years (the deferred interest). Olam is not paying more than 6.75% for their interest payment.

And that bring about my point that if Olam have a round of equity raising to repay the bonds.. then it is sort of like using the new shareholders' money to replace the old shareholders' bonds (including the 5% discount). It also runs along your idea of a deferred cash outflow just that this is the reversed. It is a delayed equity raising (Olam needs cash and lower debt ratio now, but instead of raising equity at current low price, they "deferred" it by raising money from shareholders through bonds).

It's a non-conventional logic thus I also don't expect people to readily accept it, but given that this round of right issue on bonds is also non-conventional, I thought it is worth some discussion.

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1) bond holders are not shareholders. They are intrinsically, academically and practically different. The company also view shareholders and bond holders differently. As long as you pay interest and subsequently principal, the bond holders don't disturb you. Shareholders are much more cumbersome

The rights issue is for both bonds and warrants. You may be confused.

2) technically true. But please read my caveat on the previous post.

3) There is a difference between the company and shareholders. And yes the warrant is zero cost to the company, but not so to the shareholders.

Your last statement is essentially the key to understanding how a professionally managed company would dilute itself. Let's imagine a partnership. Why would you get someone else in as a partner? Because you think the new guy will deliver more than what cost you as a current partner ie you will get less of the pie as a %, but the pie will be bigger and you will GAIN MORE THAN LOSE. That is why Buffett always look at his shareholders as partners.

Thanks for replying. It's a good discussion

1) Yup, bond holders are not shareholders but for this current right issue, they sort of are. This latest bond will be subscribed by mainly shareholders as it is a right issue. Just a rough estimate, the major shareholders and directors will account for about at least 45-50% of the bonds issued. If the remaining shareholders choose to give it up, it will still goes to Temasek. In 5 years time when the bond matures, if Olam do a round of equity placement, it will be shareholders then (might still be the few major shareholders that we have now) paying the current shareholders that are holding on to the bonds.

On the part on partnership and you will gain more than you lose, I think if we want to calculate whether the shareholders will gain or not it will be very complicated. EPS will be diluted if based on current profit level, but with more cash flowing into the company, and if the company can make use of the cash well, it can create more value than what is diluted. Too many variables to consider and no definitive prediction can be drawn.

[CityFarmer]

Moving on, for the company in the next few years, the actual financial cost is 6.75% only, and during the bond maturity, the company can have the option to do a rights or shares placement to repay these bonds if they and the shareholders want to.

The cost is not 6.75% because (1) the bond is issued at 95% instead of par; and (2) there are free warrants being given.

Even if we ignore the warrants and pretend that the amount due at maturity is only 95% and not par, the cost would already be 6.75/95 = 7.1%. But because the bond matures at par, there is an additional 5% due after 5 years. This extra interest is merely deferred, it is still payable. It amounts to about 1% per year (not exact due to compounding). So the ongoing cash cost is 7.1%, while the accounting cost is about 8% before factoring in the warrants.

Deferred interest still costs money in the end, it is simply a way for a borrower to delay cash outflows.

Hi,

Yes, I understand about 1) and 2). However, I'm talking about it in real $$ term for the next 5 years. ie: for the next 5 years before the bond matures, Olam needs to pay only the 6.75% interest. Nothing more. The "extra yield" that the bond holders will get will only come in the end of the 5 years (the deferred interest). Olam is not paying more than 6.75% for their interest payment.

And that bring about my point that if Olam have a round of equity raising to repay the bonds.. then it is sort of like using the new shareholders' money to replace the old shareholders' bonds (including the 5% discount). It also runs along your idea of a deferred cash outflow just that this is the reversed. It is a delayed equity raising (Olam needs cash and lower debt ratio now, but instead of raising equity at current low price, they "deferred" it by raising money from shareholders through bonds).

It's a non-conventional logic thus I also don't expect people to readily accept it, but given that this round of right issue on bonds is also non-conventional, I thought it is worth some discussion.

To me, it is pretty obvious that olam will pay more than just 6.75%, even in real $$ term. Let assume bond par amount is $100, and olam will only get $95, but it is paying $6.75 annually over the $95. All the numbers are in real $$ term. so it is more than 6.75% (i.e. 7.1% as highlighted by d.o.g)

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The bond will cost the company 8% in bond interest, and 5% more on warrants with a depressed strike price (decoded from Michael Dee's article). This is even for those shareholder exercise their warrants, and without dilution on their holding.

The 5% is based on the black sholes calculation. it has nothing to do with the discount on intrinsic value, which I already addressed earlier.

Put in another way: What is the cashflow cost to the company if say the stock price ended below the strike price on expiry? As the CFO would you be worried? You would only be worried if you need the money to pay the debt repayment... you wouldn't even think the warrant cost money.

Black-Scholes model calculation does not crunch out number out of vacuum. The number base on the model should be relatively reliable for discussion, rather on any other value drop from the sky.

As stated earlier, all my points are from the perspective of the shareholders, rather than the management

[zxiank]

To me, it is pretty obvious that olam will pay more than just 6.75%, even in real $$ term. Let assume bond par amount is $100, and olam will only get $95, but it is paying $6.75 annually over the $95. All the numbers are in real $$ term. so it is more than 6.75% (i.e. 7.1% as highlighted by d.o.g)

Ah yes I see! I stand corrected. It's 7.1% (me and my lousy Maths)

On another note, anybody can give a formula/indication on how much will the nil-paid rights be trading? I'm thinking of buying some but need to know how to value them

Thanks

[specuvestor]

1) bond holders are not shareholders. They are intrinsically, academically and practically different. The company also view shareholders and bond holders differently. As long as you pay interest and subsequently principal, the bond holders don't disturb you. Shareholders are much more cumbersome

The rights issue is for both bonds and warrants. You may be confused.

2) technically true. But please read my caveat on the previous post.

3) There is a difference between the company and shareholders. And yes the warrant is zero cost to the company, but not so to the shareholders.

Your last statement is essentially the key to understanding how a professionally managed company would dilute itself. Let's imagine a partnership. Why would you get someone else in as a partner? Because you think the new guy will deliver more than what cost you as a current partner ie you will get less of the pie as a %, but the pie will be bigger and you will GAIN MORE THAN LOSE. That is why Buffett always look at his shareholders as partners.

Thanks for replying. It's a good discussion

1) Yup, bond holders are not shareholders but for this current right issue, they sort of are. This latest bond will be subscribed by mainly shareholders as it is a right issue. Just a rough estimate, the major shareholders and directors will account for about at least 45-50% of the bonds issued. If the remaining shareholders choose to give it up, it will still goes to Temasek. In 5 years time when the bond matures, if Olam do a round of equity placement, it will be shareholders then (might still be the few major shareholders that we have now) paying the current shareholders that are holding on to the bonds.

On the part on partnership and you will gain more than you lose, I think if we want to calculate whether the shareholders will gain or not it will be very complicated. EPS will be diluted if based on current profit level, but with more cash flowing into the company, and if the company can make use of the cash well, it can create more value than what is diluted. Too many variables to consider and no definitive prediction can be drawn.

Shareholders subscribing for bonds are still shareholders... AND bondholders. There are different legal and credit implications. I understand what you are saying from a CASHFLOW perspective, in fact the warrant conversion is likely to be paying the bond principals, but even so you will have an increase of equity and a decrease in liability, even when your asset remains constant. but equity and liability are NOT the same thing.

Buffett is quite clear that he doesn't like equity dilution and the guesstimate of how much value is derived is probably less sophisticated than financial analytics would want us believe. During the debate on option expensing, he supported that it goes through PnL because he wants managers to feel the pain of the owners. Put in another way, if options are really that costly TO THE COMPANY, the dot com bubble wouldn't have happened because none of them would be able to survive the cost. The option debate was particularly difficult because practitioners knew options are not real cost to the company but to shareholders, but they want to reflect the cost to shareholders somehow in the equity portion of the COMPANY'S balance sheet.

As for Black-Scholes-Merton model, lest we forget LTCM, we should also remember Technical analysis, CDO AAA credits, quant trading etc are also not plucked from vacuum I'm not saying they are useless but they have their place and purpose; and we also have to understand their place.

The bond will cost the company 8% in bond interest, and 5% more on warrants with a depressed strike price (decoded from Michael Dee's article). This is even for those shareholder exercise their warrants, and without dilution on their holding.

The 5% is based on the black sholes calculation. it has nothing to do with the discount on intrinsic value, which I already addressed earlier.

Put in another way: What is the cashflow cost to the company if say the stock price ended below the strike price on expiry? As the CFO would you be worried? You would only be worried if you need the money to pay the debt repayment... you wouldn't even think the warrant cost money.

Black-Scholes model calculation does not crunch out number out of vacuum. The number base on the model should be relatively reliable for discussion, rather on any other value drop from the sky.

As stated earlier, all my points are from the perspective of the shareholders, rather than the management

[CityFarmer]

It seems the MW's crisis is over for Olam.

I remains skeptical on the way Olam management skipping shareholder approval by pursuant to a resolution in AGM. Base on the wording used in the announcement, i believe the lawyers are not 100% sure.

Is there room to short and raise a dispute with SGX? I will not do it, but will MW do it? If MW will do it, when is the best time? Logically should be when share price rises to a new peak and short-squeeze is over

I might be very wrong, just share a view on one of the uncertainty IMO

(not vested now and near future)

[CY09]

Hi ,

Just curious, what is the difference between this 3 counters?
1. Olam R US$ R8GR
2. Olam R1 US$ R9ER
3. Olam R313 US$

[freedom]

Hi ,

Just curious, what is the difference between this 3 counters?
1. Olam R US$ R8GR
2. Olam R1 US$ R9ER
3. Olam R313 US$

the lot size is different. the first one is 1000 share/lot. the 2nd one is 1 share/lot, the last one is 313share/lot