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.
Oh the white knight? Or is it not? Let us not forget that at the end of the day, every so-called white knight has to answer to its stakeholder, even for an entity with deep pockets. Enough said and analyzed about Olam by individuals here, so let me bring up a bit of history for consideration.
Back in Sep 2009, Temasek let go of Chartered Semiconductor at an undisclosed profit/loss. This was only six months after their subscription to Chartered’s rights issue, in which Temasek subscribed up to 90% of the shares. To be fair, Temasek participated in various rights issues in that year. What I would like to highlight is the mentality of placing too much faith on government/quasi’s support in companies simply because of the above mentioned reason where every entity has to answer to its stakeholders.
Olam 6% 2022 now 82-85. Perpetual is 81-84 !!
Sell the Perpetual and Buy the Senior bond !
They are making money from this pantomime here – the banks and Temasek. 2% flat fee and 0.85% to Temasek.
Dear sir, is it possible that market anticipate the perp bond could be redeemed at 2017 and with a higher coupon of 7%? That’s why it is trading similar to the senior note of 2012 bond with 6%? Just my silly thoughts.
Hi Peter
In a professional capacity as a trader or fund manager, I would be hard pressed to make that call.
This is just an opinion, of course.
It is quite impractical for the company to call the bond in 2017 at 100 when the bond is at 80 cts now. Thus it is a free option for them especially if interest rates were higher then and they cannot borrow at 7% anymore.
Senior and perp is about 2 tiers apart because perp is almost equity and equity ranks last in a case of liquidation.
Good luck !
Hi tradehaven,
Thank you so much for sharing your invaluable insights and thoughts which I am sure everyone will benefit from. May I ask, do you think its a good idea to switch from the 6% 2022 to 5.8% 2019 or 6% 2018? Or such a switch wont make much difference. In your view, how much extra one pay for would be worth considering the switch? Hope Sir can share your thoughts. I am very confused, worried that switching will end up losing even more but was thinking I might be exposed to significantly less risk if I hold a Olam bond for another 5.5 years (if I switch to the 2018), than keeping one which only mature in ten years. What other factors do you think I should consider, Sir? Hope you can enlighten me. Thank you so much.
Hi Wilson
No point switching, in my opinion. The 2022 is the same as the 2019 and the 2018 as far as seniority is concerned.
If you are worried about a default, it would happen sooner than later ie. before 2017 or 2018.
Do you agree ?
In the meantime, prices appear to have stabilised. If you are hoping to get all your capital back, it will probably not be so soon. Not especially after they just announced a 8% 5y deal. (Unless they find another white knight ???)
You obviously bought the bond with a 10 year investment horizon.
I would only suggest you either get out completely because you have lost all faith in the company as a going concern or hold on for the coupon and imagine that the bond is still 100 which is the price it would be redeemed at eventually.
The folks who would be hardest hit would be those who have leveraged on the initial price of 100 and are facing margin calls, or lien-ed the bond as collateral in their portfolios which could also result in a margin call.
I cannot advise because it is illegal to dispense advice these days.
You have my best wishes for a favourable outcome.
Hi tradehaven,
May I express my renewed thanks for sharing your thoughts and opinions again, Sir.
I hope I can get all my capital back of cos but I wont mind getting out completely at a smaller loss. After MW made the accusation, before the 133 page report was released, it is still stablising around 92 or so. But ever since the 133 page report was released, the price went down drastically to ard 80 and it hasnt improved much even after Temasek’s vote of confidence. Does it imply the price will be “stuck” here for a long while?
In your personal view, you think it is probable that the price revive a little to around the situation after the MW accusation, but before the MW report is released? (ie 90ish range for the 2022 6%)I am seriously feeling very loss and have no idea what to expect to happen next. In other similar saga, how long does it usually take for things to be restored to the normal or near conditions?
I have this silly thinking: the right issue will prompt people who have lend MW the shares to take it back so MW will probably need to buy back the shares. And since it appears that Temasek is giving its vote of confidence for Olam, MW may feel Olam may not be such an easy target so might as well give up on Olam and prey on others?? I am not sure if this is even plausible and really have no idea of what to expect to happen next from here for the next few weeks or months or a year or so.
Btw if another white knight does appear and they buy in Olam’s bond etc, I supposed they probably wont make a high profile announcement like this Rights Issue and a layman like me wont know that a white knight has arrived till I see the bond price start to pick up?
Thank you Sir for sharing with everyone your thoughts again. I fully understand that these thoughts are not meant to be proper advice but just something that you shared with others and any decision taken to sell or hold etc is solely on my own decision. No worries.
Thank you again Sir. Look forward to see more post and comments and more price updates.
We need to be clear here: there is NO rights issue. There is no additional equity contribution from shareholders until at least three years later from the latest bond offering from Olam (with warrants stapled). The immediate concern is the higher cost of capital (in this case debt) going forward. Even if banks do not pull their lines, no bank would be daft enough to continue lending Olam at exisiting spread when bonds are yielding 8-10%. Remember most of the borrowings are unsecured based on Olam’s annual report.
Hedge Fund manager Jim Chanos warned in 2009 that Autonomy had accounting issues. In 2010, he said short it. In 2011, HP bought it so he said short HP. In Nov 2012, HP had to write off US$8.8 bn of the US$10.3 bn it paid for Autonomy and HP shares hit 10-year low. The message is a lot of these accounting issues take time to play out, white knight or no white knight.
Agreed. They should stop playing defensive and get back to work giving shareholder some returns. Otherwise gonna be stuck in this rut of a roadblock and wasting more shareholder money with lawsuits and fund raising publicity stunts.
I think its clearly spelt out here. This deal stinks right? Sure, it seems like good value with all the freebies, but why the freebies? Folks. NOTHING IS FOR FREE!!! Would you want to borrow more money at a higher price when you have
Olam claims to have sufficient liquidity for the next 18 months, as soon as they made the statement, they issue a bond underwritten by Temasek? huh!?!?!… never realized Temasek is now into the underwriting business. Sounds like they are scratching each others back here. And if you are please to up your stakes, just buy it outright.
I am no expert on Olam, but the course of action is simply suspicious.
Just last Thursdays, 29 Nov, Olam says has enough cash…. go figure.
Now it seems that equity fund managers cannot hold the bonds so they will only take the warrants and dump the bonds at a discount which will affect the current bondholders more.
Bond prices stabilised today even as the stock took a beating (but still managed to close above 1.5).
The perp is holding 80 cts and the 2022 holding 84 cts.
http://www.businesstimes.com.sg/premium/top-stories/10-point-plan-tough-love-olam-20121206
If I could I would nominate this to be Business Times’ Article of the Year.
Don’t think his ex colleagues would be too pleased when they see him at the next roadshow.
I actually quite shocked to hear that Temasek is sub-underwriting the right issue, and receive a fee for it. Does Temasek has the mandate to do so? It sounded like gov bailout, on a non-local company?
Does it sounds wrong or is it just me?
There is nothing in their Constitution that prevents them from doing so.
They have long term goals with the interest the country in mind which we, sometimes, cannot visualise.