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The "rights" issue does not improve the "credit" of the bondholder because it is the right to buy bonds, with equity down the road in the form of warrant conversion. Compared that with the rights issue of TLC from DBS to Capitaland back in CDO crisis when equity was raised. Nonetheless this transaction is to add credibility as Buffett investment into Goldman etc. Perpetuals trade like preferred shares, so in distress it will swing like equity, albeit should be smaller volatility since it is higher credit.

Frankly people who criticise olam on business model on hindside is in the same boat as those that don't understand the business in the first place when they bought it. The pendulum has swung the other way. There are loads of companies that operate on leveraged WC, from system integrators, to shipbuilders, to import/exporters, and even banks in a sense. I don't think their business model is flawed per se. The issue is this model is hostage to creditors' confidence. Financial crisis through history is generally confidence crisis. There's even this value investment idea of net-net that anchors on WC liquidation of a company (which I don't subscribe to)

Like I posted previously my problem with olam is that the money raised in 08 when commodity price peaked, did not delever when commodities plunged, which indicates a deterioration of ROIC. That's why I'm not interested in Olam since then as they went on acquisition spree. It's not an issue with the levered WC biz model per se.
Hello Money,

With regard to your posting attached below, I do not believe you should stop placing postings on this Olam thread. One of the great positives of the Valuebuddies forum is that contributors express a variety of views on various investments, and in the overwhelming majority of cases they do so in a respectful manner. If forummers only posted positive messages on investments, this forum would become totally unbalanced, much less valuable and rather boring.

Your postings have not been offensive or disrespectful, so it would be a pity if you stopped now. You should not be held back by the fact that some other Forummers are vested.

Just my two cents worth.

As regards the current bond prices, I know several people who are considering going in now - viewing for example the S$ Perpetuals as a QUOTE ~ 9% p.a. yielding Temasek backed entity with a higher than normal risk level UNQUOTE. I'm not selling my Olam Bond holding but my innate cowardice will not allow me to build it any further.

I note that Olam's share price is taking a further beating today, at 2.30 pm its down ~ 5.6% to S$ 1.51 - it is one of only four primary index stocks declining in today's trading session.

Vested (in Olam Perpetual Bonds)
(04-12-2012, 11:42 PM)money Wrote: [ -> ]If i am rich, i would most likely have invested in the perpetual bonds, 7% yield is too hard to resist.

Sorry to hear that some forumners here are vested. I will stop my commenting on this company, I realise that i have been quite insensitive in my criticisms of this company, i sincerely apologize. Hopefully my criticisms are all groundless.
Can teach me how to buy Olam Perpetual Bonds ? Smile
(05-12-2012, 03:08 PM)corydorus Wrote: [ -> ]Can teach me how to buy Olam Perpetual Bonds ? Smile

Go read up post 221 & 224, you'll need to be a so-called "Accredited Investor" in order to take a punt on Olam's Bonds, i think the banks can apply the accredition for you or can call up sgx to find out more info
(05-12-2012, 04:25 PM)money Wrote: [ -> ]
(05-12-2012, 03:08 PM)corydorus Wrote: [ -> ]Can teach me how to buy Olam Perpetual Bonds ? Smile

Go read up post 221 & 224, you'll need to be a so-called "Accredited Investor" in order to take a punt on Olam's Bonds, i think the banks can apply the accredition for you or can call up sgx to find out more info

Thank you. Some how i missed those section of the thread.
Further to my posting on this Olam thread of this afternoon (excerpt below), I understand that there has been quite some buying of Olam's Perpetual S$ 7.0% p.a. Bonds today and yesterday on the OTC market, driving the unit price up. The latest quoted price I have (without broker fees) is now just above S$ 82, corresponding to a yield of ~ 8.5%.

If forummers are interested I can post the Olam Perpetual S$ price on a daily basis, every evening. I realise it isn't easy to get hold of the price unless you are vested.

(05-12-2012, 02:24 PM)RBM Wrote: [ -> ]As regards the current bond prices, I know several people who are considering going in now - viewing for example the S$ Perpetuals as a QUOTE ~ 9% p.a. yielding Temasek backed entity with a higher than normal risk level UNQUOTE. I'm not selling my Olam Bond holding but my innate cowardice will not allow me to build it any further.

I note that Olam's share price is taking a further beating today, at 2.30 pm its down ~ 5.6% to S$ 1.51 - it is one of only four primary index stocks declining in today's trading session.

Vested (in Olam Perpetual Bonds)
I would guess a retiree buy Olam Perpetual Bonds for the regular coupon payment. Why would such a bond holder worry about the daily market bond price fluctuation?
Is Olam a victim of fair value accounting?
Has fair valued accounting muddied the waters?

The 133-page Muddy Waters (MW) report on Olam claims that Olam faces a high risk of failure and criticizes the company in a number of areas, including the following:

- Aggressive capital expenditure and acquisitions, involving low quality assets, which are badly managed and which may even be tainted by significant misconduct

- Questionable accounting practices and poor internal controls over financial reporting, which could be attributable to incompetent or even dishonest accounting functions

- Questionable risk management capabilities

- Over-leverage

- Complex, or “black box”, business model

In my view, the report has not provided clear evidence to support its allegations of possible misconduct and dishonesty.

Olam fired back quickly with its own 45-page response, dismissing MW’s claims. Olam said that it has no risk of solvency, its accounting is in accordance with Singapore financial reporting standards, its business model is working, and its capital expenditure and acquisitions are paying off. However, its CEO, Sunny Verghese, was more reflective a few days later, when he said that “the firm might have to tone down the very thing that defines it - its hard-driving expansion - …[and that the company] will take stock and see whether we need to slow down, decelerate, recalibrate." (Business Times, November 30).

So, putting aside the mud-slinging and unsubstantiated allegations, is there any basis for concern about Olam?

Accounting issues

MW has raised questions over accounting issues, such as the valuation of biological assets and the “negative goodwill” associated with Olam’s acquisitions, and how they impact Olam’s profitability. Olam’s response has been largely on target in terms of refuting the intentional use of inappropriate accounting practices to boost its profits.

However, the nature of Olam’s business and its business strategy exposes it to many of the vagaries of today’s accounting framework, which is heavily reliant on fair values. Under this accounting framework, most changes in the value of assets and liabilities have to be reported as part of Olam’s income, either in operating profit or comprehensive income (“below the line”). The application of fair value accounting in many cases requires considerable exercise of managerial judgment, internal (managerial) forecasts of future cash flows, and reliance on other assumptions which can have a big impact on a company’s profitability and financial position.

Some of the items that affect Olam’s financials and which are highly dependent on fair values include those relating to its biological assets, derivative instruments and intangible assets. For instance, gains from fair value changes relating Olam’s biological assets accounted for 25 percent of Olam’s profit before tax for FY2012. On its latest balance sheet, Olam has derivative financial assets and derivative financial liabilities amounting to about 9.5% and 8% respectively of its total assets, with about half of them having to be valued without the benefit of quoted prices in active markets for identical instruments. In some cases – so-called Level 3 financial instruments – they have to be valued without observable market data, and are therefore based on valuation models.

There has also been a debate between MW and Olam about negative goodwill versus positive goodwill in its acquisitions. In a way, this has masked a more important issue – the inherent subjectivity in accounting for goodwill and other similar intangible assets.

Basically, intangible assets are classified into those with indefinite lives and those with finite lives. Today, only intangible assets with finite useful lives are amortised over their estimated useful lives. In Olam’s case, these include customer relationships, software and concession rights.

Other intangible assets, such as goodwill, are not amortised but are instead assessed at least annually to determine if they have been impaired, and therefore, whether any impairment charges should be made in the profit and loss account. In addition to goodwill, Olam has trademarks and water rights which are not amortised. One issue is whether Olam has been sufficiently robust in assessing for impairment of these intangible assets. Over the past few years, Olam has made few impairment charges for such assets. Given some of the challenging markets that Olam operate, have the fair value of these assets remained largely intact? To be fair, only 3.5 percent of Olam’s total assets on its latest balance sheet are made up of intangible assets which are not amortised.

Indeed, impairment is relevant for many other assets, including property, plant and equipment, investments in subsidiaries and associates, and other financial and non-financial assets. There is a great deal of subjectivity involved in determining whether an asset has been impaired.

Financial risk

Olam is undoubtedly a relatively risky company. According to Reuters, Olam has a beta of 1.21, compared to Wilmar’s 1.03 and Noble’s 1.28. So, Olam’s stock is more volatile than the market and Wilmar’s, but not as much as Noble.

The chart below shows the cash flow from operations for the most recent five years for Olam, Noble and Wilmar as reported in their cash flow statements (Note: Noble and Wilmar reports in US dollars. For simplicity, this and the following analysis of profitability are presented using common Singapore dollars, based on exchange rates at the end of each calendar year).

[Image: olam1.gif?1354673227]

In terms of volatility of operating cash flows, the three companies look remarkably similar based on their peaks and troughs – and they are certainly much more volatile than your typical company. However, Olam’s operating cash flows tend to be negative or just barely positive over the last 5 years. It also has consistently large negative cash flows from investing activities. Together, these are consistent with Olam being in the “growth” phase rather than flows from investing activities. Together, these are consistent with Olam being in the “growth” phase rather than the “harvesting” phase of its business cycle.

In its response to MW, Olam has produced adjusted operating cash flows data, with adjustments made for inventories and receivables that are considered “near cash”. While this may be defensible for commodity players, “near cash” is nevertheless not cash, and will carry some risk of non-realisation. In any case, these adjusted numbers are still rather volatile.

The chart below shows that Olam’s profit before tax appears less volatile than Noble, and particularly, Wilmar. Ironically, when companies are in inherently volatile industries, but their profit trend appears smooth, there may be concerns that management has “managed” the profits using the application of accounting standards. For example, they may reduce the amount provided for uncollectible accounts or rejig their internal cash flow forecasts used in valuing certain assets, within the boundaries of generally accepted accounting principles.

[Image: olam2.gif?1354673240]

Finally, when we do a simple comparison of leverage, using the ratio of total liabilities to shareholders’ equity, Noble turns out to be much more highly levered than Olam. Olam is more highly levered than Wilmar, but there is some convergence with Olam’s ratio coming down and Wilmar’s going up. Olam and Wilmar also report adjusted leverage ratios. In Olam’s case, it has made adjustments for liquid hedged inventories, citing Standard & Poor’s as an authority. As mentioned earlier, while there are good reasons for such adjustments, there will nevertheless be some risk in terms of realisability.

Internal controls and corporate governance

According to Olam, 80% of the 65 countries in which it operates “are emerging markets which are poised to grow faster”. This provides opportunity but also comes with risks. Some of the countries that Olam operate in suffer from a lack of good management capacity, and in some cases, high risk of fraud and corruption. Systems and processes that we take for granted here may be lacking. The concern in these cases may not be so much with subjectivity in values, but with even more fundamental issues of internal controls over assets and proper record-keeping. For example, fixed asset management and inventory control can be challenging. It is not uncommon in some countries for assets to be in the books, but when auditors visit the premises, there is no sign of them. These issues affect the financial statements. Olam may need to get better assurances over these controls especially from their internal auditors and provide better assurances to investors.

Governance and management are also complicated by the very business model which Olam touts as a key source of its competitive advantage. In particular, it claims a “differentiated core supply chain business” which enables it to “out-origin” its competitors by “sourcing directly from the farm gate”. This is a contributor to Olam being seen to be a “black box” because its network of suppliers is truly mind-boggling.

Olam’s latest annual report disclosed that its total sourcing volume was 10.675 million metric tonnes (MTs), made up of 24%, 48%, 18% and 10% respectively from the Americas, Asia and Middle East (A&ME), Africa and Europe. It sourced from 3.4 million farmers in Africa! This compares with 7,400 and 111,300 farmers in the Americas and A&ME. Average sourcing volume for Africa per farmer was about 0.5 MT, compared to about 309 and 42 MTs for the Americas and A&ME respectively. In terms of per hectare, it was 0.53 compared to 1.51 and 26.1 respectively. Olam has to deal with a huge number of relatively small suppliers in Africa. In a way, Olam adopts a contrarian supplier strategy compared to many other companies in other businesses – which is to reduce the number of suppliers it deals with directly in order to improve supplier management and relationships.

Therefore, a fair question to ask is this: how does Olam manage such a complex supplier network? Is the so-called competitive advantage truly translatable in the long run into better performance than its competitors?

Olam clearly puts a lot of emphasis on risk management, and it has to because it has to deal with many risks, including those relating to the nature of its business (commodities), extensive use of derivatives, high leverage, aggressive expansion, accounting, its “differentiation strategy”, and doing business in emerging markets.

It has also adopted many of the “best practices” in the Singapore Code of Corporate Governance. However, the most important corporate governance (and management) issues for Olam have to do with its subsidiaries and operations overseas, and with its supply chain. The robustness of its process in evaluating capital expenditure and acquisitions, including post-implementation reviews of such expenditures, would also be an important part of its corporate governance and management. Other issues that are important include how it deals with fraud and corruption risks, and risks associated with environmental and social issues, especially in emerging markets. Indeed, the MW report cites some news reports criticizing Olam for its practices in certain markets and questions its dealings in some of these markets.

The crisis faced by Olam should also serve as a warning to other Singapore companies which are expanding overseas into challenging markets. They will need to pay attention to corporate governance of their foreign operations and along their supply chain.
My 2 cents worth...

From a credit point of view, the rights/bonds issue was actually more pro-equity as compared to pro-bonds. The bonds issue will further raise leverage (even thought approximately 50% will be used to refinance), while the equity portion will only come 3-5years down the road. Only then, will the leverage lower. The scheme is clearly to benefit the equity holders (which unfortunately will have to suffer higher interest expenses). In return, what bondholders get is a better liquidity buffer and a backstop from Temasek. This move benefits the 2013 bonds more than the longer-dated issues.

Hmm... from what i understand on Olam bonds, the 2017 USD benchmark bonds saw some 2-way flows last week, with private banking clients stepping in to buy on bargains. Upon the announcement of the bonds/rights issue underwritten by Temasek, those bonds actually jumped 7points to 92.5points. However, as with the equity selloff, they gradually sold off falling back to the around 90points. As of 5pm today, it closed at around 88/90points. I'm not too sure how much yield that translates into, but probably around 8.3-8.6% yield. (Yield was a 10% in end-November).

On the perpetuals, its rather unfortunate that you are currently holding on to those bonds. (Damn Muddy Waters).
However, do note that the perpetuals are subordinated to the other senior bonds, which means they should trade at a higher yield.
Moreover, as the bonds are currently trading below par, which means they are less likely to call the bonds back at par (on the respective reset date). Without the call, you will on March 2022 (10years later), receive a coupon of SOR+initial spread of 4.965% +1% yield. As such, unless Olam improves so much that their spread decrease significantly, i highly doubt they will call the bond.
What i hear is that given the risk, the perpetuals should probably give a yield of about 12-13%. Which means, there could potentially more downside.
I cant really comment coz i dont have the prices and yields for the 2018 SGD bond. Due to the lower likelihood of call (high extension risk), and subordination, the Perpetual should trade much wider than the 2018 SGD bond. (The 2018 SGD bond should in turn be benchmarked against the 2017 USD bond).
That said, i personally wouldnt recommend selling now. Olam is almost quasi-sovereign now, shouldn't go burst. I am also personally biased against Muddy Waters, i believe that while Olam is shady, there is no fraud. Please talk to your RM for more information.

Prospectus of the Olam Perpetual issued in 2012 (are we talking about the same one?):$FILE/51814284_1_Final%20Information%20Memorandum%20%28dd%2022%20Feb%202012%29.PDF

I dont know if the bonds are mispriced vs the equity, but in any case its rather hard to be short any of those. Personally thought that bonds seemed to have stablised more than the equity (down 8% from the pop to 1.70).
Investment grade is BBB- above, but some blue chip names do not get rated because they believe they can sell their bonds without a rating (have been increasingly prevalent in Asia). A good example will be CaptiaLand, Wing Tai, Henderson Land, Wheelock, NOL, Starhub, Guoco Land, F&N. But ya, if too many retail investors jump into this, might become the next Lehman bro mini-bonds saga. Protesting in Hong Lim park?
The Straits Times
Published on Dec 06, 2012
News Analysis
What's the deal behind Olam's rights issue?

Capital-raising exercise looks like a good deal, but raises more questions

By aaron low

AT FIRST glance, Olam International's capital-raising exercise is a pretty sweet deal for investors.

The rights issue is a complex structured deal that allows investors the right to subscribe to a bond offering that has warrants attached.

For every 1,000 shares an investor holds, he can subscribe to 313 bonds, which come with 162 warrants. The total outlay will be $363.

The five-year bond itself will pay an interest of 6.75 per cent. But because it is being priced at 95 per cent to its face value of US$1 (S$1.21), its effective interest rate is actually about 8 per cent.

The warrants can be converted into Olam shares at the conversion price of $1.575 but only after a period of three years. The value of these warrants, which can be traded over the exchange, are a bit trickier to estimate. They become valuable only if Olam shares trade above $1.575.

One indicator of future price performance is to see where analysts think Olam and its share price are headed. According to Bloomberg, the average analyst target price for Olam is about $2.06.

Using rough calculations, this means that each warrant is worth about 48 cents. In other words, investors subscribing to the rights issue are getting both 8 per cent coupon bonds worth $381 as well as warrants potentially worth $78. All this for $363.

On top of that, the entire exercise is meant to shore up confidence in Olam, which has been under fire from short-seller Muddy Waters raising questions about the firm's acquisitions and debt levels.

The rights issue will raise about US$1.25 billion for the embattled commodities trader, which has seen its share price fall by about 12 per cent since the first Muddy Waters salvo was fired at Olam.

Temasek Holdings has said that it is committed to taking up its share of the rights but that it will also mop up whatever bonds and warrants not subscribed by other Olam shareholders. This is Temasek's way of telling the market that it has full confidence in Olam, in which it first invested in 2003, way before the company was listed in 2005.

"We view this as a clear indication of Temasek's support of and confidence in Olam," said Standard Chartered analyst Adrian Foulger.

So why have Olam shares continued to flounder, falling 5.31 per cent to $1.515 yesterday?

The simple truth is that the rights issue has raised more questions than answers.

First, there are many niggling questions over how the issue itself was first conceived.

As late as last Thursday, Olam chief executive Sunny Verghese was telling the media that he was not looking to raise more debt.

He even bought one million Olam shares on Friday to show his full confidence in his own firm.

Then on Monday evening, in a hastily assembled press conference, Olam announced the deal to raise more debt.

Mr Verghese said that it was the company's banks that went to Temasek to propose the rights deal. Temasek then approached Olam, he said.

But this sequence was clarified in another statement sent out by Olam on Tuesday, that stated that it was Olam which had instructed one of its banks to go to Temasek to discuss the investment deal.

The confusion is adding uncertainty to the mix, and the market is clearly reacting very poorly.

The other more fundamental question is why is Olam even raising more debt in the first place?

On more than one occasion Mr Verghese has said that the firm has $10 billion in liquidity.

His attempts to soothe investors by emphasising that the latest rights issue is aimed at reducing the stress levels in the bond market as well as adding "additional liquidity" is becoming less convincing.

For one thing, why does it need to raise more expensive debt to pay off cheaper debt due next year? Could it not have drawn on its credit lines to repay that debt?

Highly leveraged companies like Olam cannot afford to lose its investors' and lenders' trust and faith.

It has been two weeks since Muddy Waters opened its guns on Olam and for all the defiance the firm has displayed, it does feel as if the market is losing confidence in it, given the falling share price.

What the bond and warrants issue has given Olam is the most precious commodity of all - time.

Olam embarked on an acquisition spree over the past three years, making cumulative capital expenditure investments that had hit US$4.4 billion for the financial year ended June 30.

The capital injection that will be generated by the new rights issue should give Olam about a year to digest these acquisitions. This might mean phasing out some planned investments or even selling off some assets to strengthen its balance sheet.

It will also need to start showing positive cash flow earlier than the 2015 target Olam had set itself. If not, the market will start questioning again how the firm will pay for all the debt that it has accumulated.

If that comes to pass, the sweet deal could become very bitter indeed.


The Straits Times
Published on Dec 06, 2012
Olam bond prices perk up, but shares take a beating

By Goh Eng Yeow Senior Correspondent

OLAM International appears to have partly stabilised the prices of the bonds it had issued, though its shares were hammered yesterday.

The stock fell 8.5 cents, or 5.31 per cent, to $1.515 after rising as high as $1.71 on Tuesday after it unveiled a rights issue that could raise up to US$1.25 billion (S$1.5 billion) for its balance sheet.

But its bonds have rallied sharply, after hitting all-time lows last week amid fears over the company ignited by short-sell research outfit Muddy Waters.

Olam bond yields had soared to between 10 per cent and 14 per cent, as bond investors scrambled for the exit. Increasing yields, besides meaning higher payouts by Olam, indicate that the market sees the company as a riskier bet.

The rights issue announced on Monday night went some way towards addressing that issue. For every 1,000 Olam shares, a shareholder can subscribe to 313 bonds with a par value of US$1 at an issue price of 95 US cents, which come with 162 warrants.

As the bonds carry a coupon of 6.75 per cent, this gives it an effective yield of 8.1 per cent.

Maybank Kim Eng analyst James Koh said in a note that setting an effective yield of 8.1 per cent for the new bonds may signal the Olam management's intention to try to bring down the high yields on bonds already out in the debt market. If so, Olam appears to be succeeding.

Yesterday, its US$500 million bonds that mature in 2017 and have a coupon rate of 5.75 per cent were traded at a yield of 8.45 per cent, down from 10.03 per cent last Friday.

Yields for other Olam bonds have fallen to around 8.35 per cent to 8.7 per cent, indicating confidence in the company among bond investors has improved.

Even the stress on the perpetual bonds, which were issued at par with a 7 per cent coupon early this year, has subsided.

They fell to a record low of 75.439 cents to the dollar last Thursday, making a yield of 14.67 per cent, showed Bloomberg data. By yesterday they had recovered to 84.94 cents to the dollar, with yield falling to 11.61 per cent.

The recovery would have addressed at least one of the concerns raised by chief executive Sunny Verghese at his briefing on Monday to announce the rights issue. He noted then that the objective of the exercise was to relieve pressure on the share price created by short-sellers and pressure on the bonds side.