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
– 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.
As an illustration.
Assume the bank is willing to lend you 50 cts to the dollar of an Olam bond at say 1%.
If you buy 1 mio, you only need to fork out 500k.
That would give you close to 20% per annum return if you bought the bond at say over 10.5%. This is just rough math. But of course your take home interest would be less because the coupon is lower than 10.5%.
So you hope for the principal to be returned upon maturity.
If you hold the bond for 5 years, that would be 100% return.
Quite a nice little lottery isn’t it ?
Lets pray Muddy Waters doesn’t go after Genting next !! (joke)
The important question any investor should ask is – is Olam’s business model a viable one? This is a company that is highly leveraged, what is it doing with all that borrowed money – from you the investor. Do you as an investor agree with its business model. Compare it with similar companies.
Trouble is that there are few companies with Olam’s front to back business model. The rest of the agri companies do not own both their production and distribution networks at the same time. Thus there are only handful of comparables if you ask me, including DeBeers diamonds.
But their cash burn rate is too recklessly high and they are jeopardising investors with their endless share buyback programme and the silly lawsuit.
Why can’t they just ignore the incident and go back to work ?
If Muddy Waters had the guts, they should go after NOL and their higher cash burn over the past decade. But they dare not overstep the boundary.
Being unique doesn’t give you a free cheque book. There are better run commodity companies around.
I am sure there are alot of people out there who would disagree with you. So far, we have OCBC, UBS, SCB, etc all rating them a BUY.
Only Kim Eng still has the guts to say SELL (target 1.40 which is not far from here).
It is preposterous now. Olam Debt/Equity ratio is >200% (Mkt cap 3.764 bio Debt 5.8 bio) and this is before the new debt issuance of 750 mio.
Last known Financial Leverage 4.7 times.
@dialastrategist you could be right.
Excellent summary..I do feel what we are seeing is blind support by SIngapore in what is likely a key supply chain partners in the food sourcing sector for Singapore. I have searched and searched but cannot find any available public information on commerical contracts between Singapore and Olam. Temasek is fully “in” to use the poker term and all are awating the flop card. I am not a bond holder but if I was I would be extremely unhappy if I had taken down the Oct deal. I would be looking closely at disclosure or lack of it by Olam leading up to that deal..20 dollar hit on debt in a matter of 2 months bears some further investigation. As for future opportuniites the local banks no doubt would get a rapid cease and desist call from some Singapore regulator if they began to quoite CDS on OLAM…but there is enough USD debt and more than enough foreign banks (think HK based) that could get a market going in say OLAM 5 yr CDS…likley will trade with an upfront given the default probability but would extend the short play given the coming OLAM/Temasek engineered short squeeze with this warrant structure. Think financial mugging and you wont be far off the mark. Now that this mechanism has been used and “blessed” by Singapore they have opened up a can of worms for abuse by all and sundry that are listed here….
Indeed. It was less than a month from the last issue they jammed down the poor retail’s throat on 30th Oct before the news broke.
I would be surprised if you found information on contracts. Do keep me posted.
My opinion remains that the warrant/bond is a poorly conceived rebuttal that did not take into account that equity fund managers cannot hold the bonds that will be stapled to the warrants and they will be dumping them in the street soon enough. The banks obviously advised on the deal from the company’s (and perhaps, their own) perspective, without considering all the stakeholders.
Well, we know what HKE thinks about it.
Qualifier : Nothing libellous intended in this comment.
Olam’s debt at 30 Sep 2012 totalled $8.4b, net debt was $7.0b. Market cap today is $3.5b. The last time Olam shares closed at $1.45 was in Mar 2009.
For comparison, at 31 Mar 09 (very near market trough globally) Olam’s debt totalled $3.2b, net debt was $2.8b and market cap was $2.5b.
Looks like Olam will be working for the creditors for a while since there is no new equity in the proposed deal. Banks are likely to ask for a wider spread when lending to Olam going forward since almost all the debt is unsecured so why should banks ask for less than where the bonds are offered? That said, the bonds have been inching higher in price in the last two days as brave souls continue to bet that this company is not as bad as MW say it is.
Or maybe, just maybe, banks are extending more leverage to retail clients to take on this risk.
Having said that, we are seeing unprecedented inflows into fixed income at this stage of the year and everything is just getting too insane for folks in the trade to accept as the new norm.
I don’t know if there is something out there that I am not aware of, but I am getting a little scared.
Just to share a thought. Can’t we apply simple solutions to complex problem. No one has mentioned about the company revenue & expenses till now. Olam has 17 billion sales revenue, so I supposed their operating expenses are at some 16.5 billion.
While company does not have full control over revenue, it has much better control over expenses. There are many areas that the company could execute ruthless effectiveness & efficiency. Every 1% saving could translate to 165 million profits. If I remembered correctly, transport expenses alone is some 1.4 billion in their P&L. A 20% saving translate to some 280 million. This is just an example. Has they expanded too much that they have overlook overall cost efficiency.
I hoped that I’ve not overly simplify their problems. Sure there must be better ways to execute their work.
Generally for trading firms the margin is thin and they need to book the entire sale proceeds and cost of sales in P&L hence they have massive top line numbers. Check out the Japanese trading houses’ accounts and you will have a good idea.
I wonder if the 17 billion includes the “biological” gains ?
Yes, you are absolutely right. They need to cut costs and even more so now that their interest expense is going to soar.
Their expenses could be “sticky” in that they operate in alot of high risk jurisdictions so hopefully revenue can grow as well.
I think yes, it included “biological” gain of some 110 mio. Gus is very correct to point that trading margin is very thin. Hence every savings is even more important.
The largest cost component in P&L is transport & logistics standing at 1.4 bil. It definitely looks very meaty & ripe for cost cutting..
One Hedge Fund Manager is predicting Olam topline between 17 billion to almost 25 billion for the year ending Jun 2013.
Smart Estimate is around 21 billion.
If Olam can stop or better still reverse their capital expenditures, both realised outcomes can bring lots of cheer to their investors.
Shayne Heffernan Ph.D.
Economist/Hedge Fund Manager