I Told My Dad To Take Up The Olam Offer … Then….

Its between the Devil and the Deep Blue Sea. Shareholders are hostage but given a lifeline, say nothing of the bondholders, too bad. Don’t cry if you had bought the 5.75% 2017 USD paper ONLY 2 MONTHS AGO because you are not getting anything out of this.

8% rough yield on a 6.75% 5Y bond issued at 95 cents with half a detachable warrant at zero cost.

The deal is this. Every 1,000 shares entitle a subscription of 313 bonds and 162 warrants. Buy 1 get 1 free.
Temasek will backstop the USD1.25 bio deal.

Simple math.

The company’s profits expected this year would be USD 370 mio. The new bonds will add another USD 50 million to interest expense each year. Currently, their interest expense is looking like USD 473 mio.  With new bonds coming next year at higher interest rates since the precedent is set for 8% already, we would expect interest expense to increase.

I sieved through some headlines in the news today about the deal. Citibank upgraded Olam to a BUY with price target $2.75. Then they put down a whole bunch of qualifiers.

1. Risk that there is a sharp decline in credit markets or other factors that could constrict trade volumes
2. An inability to refinance debt as it matures
3. Poor execution ? That would lead to lower than expected returns on its plantation assets and midstream processing assets particularly its USD1.3 bio fertiliser project in GABON.

Religare Capital Markets (based in India where Olam was from) gave a slightly dimmer view, maintaining a SELL rating on the bond citing rising interest rate costs and future share count dilution from the warrants.

Everyone else just shut up when they hear Temasek, just like I am about to after this.

HEADLINES

* OLAM SAYS RIGHTS ISSUE TO BE 100% SUB-UNDERWRITTEN BY TEMASEK
* OLAM CEO SEES “VERY LITTLE CHANGE” TO ITS GEARING RATIO  (??MEANS THEY WILL USE THIS MONEY TO REDEEM DEBT ??)
* CREDIT SUISSE, DBS, HSBC, JPM WILL UNDERWRITE OLAM ISSUE (????? SO THE BANKS UNDERWRITE THEN IF THEY CANNOT, TEMASEK WILL STEP IN ?)
* TEMASEK “PLEASED” TO HAVE ANOTHER OPPORTUNITY TO INVEST IN OLAM
* OLAM CEO SAYS THIS ACTION WILL “CORRECT” OLAM BOND PRICES  (?????!!!! HOW HOW HOW ?)
* OLAM : MINIMIZES EQUITY DILUTION AS IT IS PRIMARILY A BOND ISSUE (???!!!! POOR BONDHOLDERS)
* OLAM CEO SAYS “THERE WAS NO NEED FOR US TO RATE”  (???!!!!)
* OLAM : TEMASEK BUYING STRAIGHT EQUITY NOT A PRACTICAL SOLUTION  (??!!! WHY NOT ?????)

Some Thoughts

1. Existing olam 5yr USD (5.75 9/17) was issued 2 months ago, and traded around par then.
2. New 5yr deal (offered to shareholders only, not available to general market) is coupon 6.75, priced at 95, so around 8% YTM, or around 91 cash price of the old one.
3. Plus, they are giving free warrants at current market price, 5yr maturity.  Clearly lots of value there.
4. So Olam, having claimed they have S$ 10bn of liquidity, are now raising US$750m in bond + potential 500m in shares at extremely generous levels, bond is 9 pts cheaper (about 225 bps wider) then were they raised prior to this, 2 months ago !
5. You decide whether Olam is generous to its supportive equity holders, or really does need the $$$ and paying up.
6. Having said all that, for anyone holding the shares, they got to subscribe (or sell the shares today/tomorrow, I think they will rally)
7. To do nothing is wasted.
8. It is a v cheap deal for shareholders, thats why shares can rally now.

Read the fine print !

Olam disclosed they are paying the banks about 2% as fees. ie. the bond yield should technically be closer to 8.5% if they did not pay the banks. The banks will then pay Temasek 0.85% for sub underwriting whatever the banks cannot sell. Either way, they win. They won when they sold the public the 2.5% 09/2013, the 6% 10/2022, the 5.8% 2019 and the perpetual (the fees were nice then too).

Guess What I Told My Dad ?

Just dump the shares when people buy them up and have nothing to do with the company again (After all, it looks like all Singaporeans have a vested interest in Olam now that our national reserves are there. Why Double Up ?). And there is no need to taste bile for the next 5 years !

BTW, here are the indicative levels my banker is showing me.

Indicative Levels
OLAMSP 4.07 2/13        98.75 / 99.75
OLAMSP 3.00 2/13        98.75 / 99.75
OLAMSP 2.5 9/13 98.50 / 99.50
OLAMSP 5.75 09/17       91.00 / 92.50
OLAMSP 6.0 8/18         87.60 / 89.60
OLAMSP 5.8 7/19         84.25 / 88.25
OLAMSP 6.0 10/22        82.15 / 85.15
OLAMSP 7.0 PERP         80.50 / 83.50

Qualifier for Libel : This is intended as  a private opinion and is, in no way, meant to be a licentious attack on the integrity of the company mentioned. The writer has no intention of buying or selling any product related to the company for a very very long time.