Short Analysis on Olam Bonds – Some Questions Answered

Qualifier for potential libel : I do not hold Olam bonds or stocks and do not intend to execute any trade in them for the next 6 months. This is a personal and unsolicited opinion and not intended to be in any way a licentious attack on the company and does not represent the views of any other person or organisation that I am aware of.

Olam bonds have pretty much lost up to 20% of their value since the Muddy Waters opinion surfaced. Given that most of the SGD 1.375 bio issued this year is sitting in retail accounts, the pain is accentuated and widespread. But this is not the time for the blame game here.

I am hoping that this little post would be enlightening or partially comforting to bond holders at the least.

There are 11 Olam bonds out there. 2 are USD convertibles maturing in 2013 and 2016 totalling USD 519.2 mio . 2 are USD senior papers due in 2017 and 2020 totalling USD 750 mio. And 7 SGD issues totalling SGD 1.975 bio.

Since commenting about Olam in the past week, I noticed that most banks have stopped publishing prices for the bonds leaving a black hole in the market now making price discovery difficult.

These are the prices I have managed to salvage from Bloomberg.


The prices for the 2022 and 2019 were taken from a central price discovery channel created by MAS for banks to contribute to. I notice that they are significantly higher than the fair value price that Bloomberg provided in the second column. Both prices are not dealing prices.

I got to thinking about the share price and dragged out the chart.  The share price has stabilised since Temasek said it’s maintained its position in the company and the CEO bought another $1.5 mio shares.


It is ironic that Kim Eng Securities pointed this out in June this year when the share price took a beating after Olam’s then CFO resigned.

Olam International – A Curious Situation
– Olam’s share price has jumped 10.5% since announcing commencement of a share
buyback programme last Friday. These are usually a positive sign, but the
circumstances here are curiously unique.  
– Given its high gearing ratio, Olam is essentially borrowing money to buy-back
shares. Assuming a full exercise of its share buy-back mandate, this SG397m
could represent an outlay similar to its entire dividend payout history since
2004 IPO.
– Ultimately, empirical evidence shows many companies never complete these
programs. We think the market may have over-reacted on this news. Maintain SELL
with TP pegged to 1.2x P/B.
(reproduced without permission – please don’t sue me)

Banks have limits to the amount of bonds they can absorb and that limit is unlikely to be very large. What they can try to do so as not to create panic is to discourage widespread dumping because that would affect the bonds they already hold and cause a big loss on everybody.
They can put a price up that looks reasonable for everyone without having to honour it because it is an OTC market and all investors are in the “accredited investor” category which makes it tough for potential investor recourse.

That Olam should agree to Muddy Waters’ offer to get a rating is UNLIKELY, in my opinion, for I will bet heavily that they cannot make the investment grade mark ie. BBB-.

Olam will not buy back bonds because they can go on recognising  a profit from their liabilities ie. the lower the bond price goes, the more profits the company can book. It would, however, damage their future borrowing ability and it looks like they would have to pay up next year for their refinancing needs. (but maybe they will get a bank loan then, if banks are willing to lend)
That is a problem for next year as interest expense does not add to the balance sheet until it is realised.

UBS also sent out a short note on Olam recently, urging investors not to panic.

Right now, I would assume that banks will be making very low ball prices in the OTC market and I am sure the retail investor will not be able to get a decent bid anywhere close to the prices in the table above.

The offers will also be far off and I am still hearing that banks are willing to loan money for investors who buy the bonds now which is an encouraging sign.

I will not venture to advise anyone to buy or to sell because the probability of further capitulation is 50-50.  The reason why the bond price is floundering is because banks could be running tight on the name and there is indigestion in the marketplace. If we manage to avert a stampede of selling and find some willing buyers, the bottleneck will ease. But the main problem is that they have a pile of maturities next year and thus the buyer’s dilemma.

I have been harping on the reckless nature of issuance without price support for a long while now. That was the main reason why I left credit trading. It just felt slightly irresponsible especially in the face of a crisis and I have seen too many of them. And surely I would have better things to do on a Saturday night than this so I hope it is helpful to someone out there.

Good luck.