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Olam Rebuffs Muddy Waters, Citing S$10 Billion Liquidity

Olam Rebuffs Muddy Waters Claims Citing S$10 Billion Liquidity
Sunny Verghese confirmed a claim from Muddy Waters that Olam had suspended a $200 million sugar-refinery venture in Nigeria that was announced in December 2010. Photographer: Munshi Ahmed/Bloomberg

Olam International Ltd. Chief Executive Officer Sunny Verghese dismissed claims from Muddy Waters LLC of potential insolvency by pointing to the commodity trader’s more than S$10 billion ($8.2 billion) of liquidity.

“This whole bogey of trying to say that we have some kind of liquidity crisis cannot be corroborated,” Verghese said yesterday at a press briefing in Singapore. “I just can’t understand” how Muddy Waters could suggest the company may fail, he said.

Olam, one of the world’s top three coffee traders, has dropped 11 percent since Muddy Waters founder Carson Block first questioned the company’s finances and accounting practices at a London conference on Nov. 19. The U.S. short-seller rated Olam a strong sell in a 133-page report released on its website two days ago in which it likened it to failed energy trader Enron Corp. The Houston-based company lost $68 billion in market value from its 2000 peak to filing for bankruptcy in 2001.

The company’s “clarifications have helped Olam’s stakeholders to better understand Olam’s business,” Patrick Yau, a Singapore-based analyst at Citigroup Global Markets, said in a note to clients dated yesterday.

Olam shares gained 3.3 percent, the most in a week, to S$1.55 as of 11:41 a.m. in Singapore. They’ve dropped 27 percent this year, making the stock the second-worst performing member on the benchmark Straits Times index. The yield on Olam’s S$500 million of 6 percent bonds due October 2022 fell 21 basis points to 8.745 percent as of 12 p.m. in Singapore, according to prices compiled by Bloomberg, the most since they began trading last month.


Muddy Waters values Olam on a “liquidation basis, because our opinion is that it is likely to fail,” it said. Olam uses non-cash accounting gains to boost earnings, has been “burning cash” and will need to raise or refinance as much as S$4.6 billion of debt over the next year to remain solvent, the research firm said.

Olam isn’t planning any impairment charges as a result of the report, Verghese said.

Olam is getting support from shareholders, including Singapore’s Temasek Holdings Pte, as well as customers, Verghese said.

“I am grateful that they have stood by us,” he said of Temasek, owner of a 16 percent stake in Olam, according to data compiled by Bloomberg. “The fact they have stayed invested and kept the faith is the biggest support I can ask for.”

Temasek’s spokesman Stephen Forshaw said in an e-mailed statement today that the state-owned investment company has maintained its position in Olam.

Debt Obligations

Olam has the capacity to meet its debt obligations of S$1.5 billion in the next 12 months, in addition to its planned spending, the Singapore-based company said yesterday in a statement. The company supplies 21 products from cocoa to rubber from 65 countries to 12,300 customers. It’s one of the world’s top six cotton traders.

“We’ve reached out to all” our counter-parties and customers, Verghese said in an interview after speaking to reporters, adding that none had pared back commitments with the company. “They are showing a lot of support.”

Verghese confirmed a claim from Muddy Waters that Olam had suspended a $200 million sugar-refinery venture in Nigeria that was announced in December 2010. The company is seeking clarity on a new government regulation that may require it to start sugar farming and milling operations as a condition of building a refinery, he said.

Nigerian Venture

“If the government insists that this new structure will prevail and you have to get into farming and milling, then we don’t have the investment appetite to make that enlarged capital commitment,” he said. “In which case we will permanently abandon the project.”

The stalling of the venture may present a “serious problem” for Olam, Muddy Waters said in its report.

While Olam has said its capital projects will have “high” returns on investment as they mature, Muddy Waters has found many are performing “very poorly,” Block said earlier this week in an interview with Stephanie Ruhle and Tom Keene on Bloomberg Television’s “Market Makers.”

Block said he had “shorted” Olam, seeking to profit by selling borrowed shares now and buying them back later at a lower price. Olam started noticing unusual trading patterns in its stock in May, Verghese said.

“It is instructive to view Olam through the lens of failed U.S. trader Enron,” Muddy Waters said in its report. “There are a number of material similarities in the way their businesses developed, and their actions.”

Enron Bankruptcy

Enron, once the world’s largest energy trader, plunged into bankruptcy in December 2001 following revelations it was using off-balance-sheet vehicles to hide billions of dollars in losses and inflate its share price. More than 5,000 Enron employees were fired and about $1 billion in retirement money was lost.

Its creditors had received $21.8 billion in cash and stock as of January this year, equivalent to 53 percent of its obligations, according to a report by Enron Creditors Recovery Corp., set up to liquidate the company’s remaining operations and assets.

Olam is targeting annual profit after tax of $1 billion by 2016. Net income in the 12 months through June was S$370.9 million, 14 percent lower than a year earlier. Olam is well “on track” toward achieving its target, it said.

It expects to generate S$3.2 billion of total earnings between now and 2016, Verghese said yesterday.

Fixed Capital

The company will need about S$3.5 billion of fixed capital in the next four years, which will be 40 percent from equity derived from retained earnings, and 60 percent from new debt, Verghese said. The company won’t issue any new equity, he said.

“Even if capital markets are to dry up and we didn’t do any new debt capital market raising -- 12 to 18 months which is the time or even maybe 24 months is the time for our current capex to be executed -- we’ll be able to continue to run our business without any problem,” Anantharaman Shekhar, Olam executive director, said yesterday.

While Muddy Waters has in the past targeted New Oriental Education & Technology Group Inc., Fushi Copperweld Inc. and Focus Media Holding Ltd., Block said this week he’d lost interest in betting against Chinese stocks.


Block, 36, research director of Los Angeles-based Muddy Waters, had successfully bet against Chinese companies that trade in North America after raising doubts about their accounts. One target, tree-plantation operator Sino-Forest Corp., slumped 74 percent before eventually filing for bankruptcy protection in March.

“In my view, Muddy Waters and Carson Block are just small parts of this whole thing,” Verghese said. “He’s probably the front but behind him there are probably some very strong hedge funds involved.”

Olam is seeking to establish a connection between Muddy Waters and possible backers, he said.

Muddy Waters has yet to make direct contact with Olam, according to Verghese, who said the research firm has had representatives visit its Singapore office in disguise. Offices in Nigeria, Gabon, Ghana and other locations have also been visited, he said.

Singapore Disguise

“Every time taking on a different persona and hiding behind some facade or the other,” he said. “They’ve never had the courage or the decency or the integrity to talk to us, ask us questions.”

Olam sued Muddy Waters and Block in the Singapore High Court on Nov. 21, calling Block’s remarks in London malicious falsehoods. The company is seeking unspecified damages, costs and an injunction against republication of the comments.

Muddy Waters was “following a strategy of shouting fire in a crowded room and hoping it will devastate us,” Verghese said. “But we will stand up to this.”

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