Good article by Prof Mak Yuen Teen in the Business Times (Singapore) about the collapse of ABC Learning Centres in Australia, and the similarities and differences with Olam.
"The main criticisms of Olam by Muddy Waters were about its business model, accounting, aggressive acquisitions and capital expenditure, leverage and weak operating cash flow. These are very similar to the factors which contributed to ABC's demise."
"Supposedly long-term debt can quickly become repayable in the short term or much more expensive, especially if debt covenants have been breached. Breaches of debt covenants can also have a domino effect."
"Although its profits had been increasing steadily over the last few years, there have been many cases of companies which have failed on the back of positive profits and negative operating cash flow."
"It emerged that the Groves and some of the other ABC directors had pledged their shares to borrow money. As the share price plummeted, they were forced to sell shares equivalent to 5.6 per cent of the company to satisfy margin calls. This flooded the market with shares and pummelled the share price further."
In Olam's case, its CFO had not provided a backstop basic risk management advice to its acquisitive-minded CEO because: going on an acquisition spree just before & during the GFC and booking huge NON-cash profits is a recipe for insolvency.
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