Tuesday, 4 December 2012

Olam debt concerns persist after cash call

Olam announced a rights issue, the following is taken from Reuters website:

Olam International Ltd's $1.2 billion cash call lifted its shares but failed to ease concerns about the Singapore commodities firm's financial position after its CEO only last week said it would not tap debt markets for the next five to six months.

Olam managed to get full backing from powerful Singapore state investor Temasek Holdings Pte Ltd, its second-biggest shareholder, for a complex bonds-with-warrants issue to battle short-seller Muddy Waters. The move sent its shares up more than 8 percent to a nearly two-week high on Tuesday.

But critics including Muddy Waters and several analysts warned that Olam needs to shore up its weak cash position after piling up debt to finance expansion.

"This rights issue has not addressed ongoing concerns regarding low margins, high leverage, and the need for cheap funding amidst wafer-thin 5 percent EBITDA margins," said Owen Gallimore, ANZ credit strategist.

Olam borrowed heavily to fund its expansion beyond trading into the actual production and processing of agricultural commodities from cotton to coffee to cashew nuts.

Bond markets have grown jittery over debt which totalled S$8.4 billion ($6.9 billion) at the end of September.

And Muddy Waters responded:

Only four days ago, Mr. Verghese vehemently insisted that it would not tap the markets for at least five months. This 180-­‐degree reversal supports our thesis that the Company was in dire straits over the weekend. (This reversal supports another point we have made about Olam – its management should be given no credibility. Its predictions of high returns from its CapEx binge are likely to turn out to be as inaccurate as its five month prediction.)

Olam’s effective cost of this debt is likely over 10%, which should indicate that this raise was not a luxury for Olam. The yield without the warrant is 8.08%, and with the cost of the warrant, the effective cost to Olam is likely in excess of 10%. The proceeds from this issuance are not intended for CapEx. The Company has stated that the funds raised will be for working capital and to repay existing debt. Its existing debt is presumably much less expensive than this new debt.

The war of words between Olam and Muddy Waters will most likely continue for some time. One thing is important to note, if Olam does survive, then it doesn't mean there wasn't any merit in the reports of Muddy Research. But the opposite also holds.

The last paragraph of Muddy Research's paper is unrelated to Olam but interesting towards China listed stocks, it mentions all the top accounting firms:

"the Ontario Securities Commission has charged Ernst & Young with securities violations for  allegedly not performing its audits on Sino-­‐Forest with proper diligence. E&Y also agreed to pay US$117.6 to settle class action claims resulting from its audits of Sino-­‐Forest. Separately, the United States Securities and Exchange Commission has also announced that it is suing the PRC affiliates of E&Y, KPMG, BDO, PwC, and Deloitte for failing to comply with requests for their audit papers of various US-­‐listed China companies."

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