Muddy Waters Offers to Pay S&P for Second Opinion on Olam

Muddy Waters Offers to Pay S&P for Second Opinion on Olam
Sunny Verghese, group managing director and chief executive officer of Olam International Ltd. Photographer: Munshi Ahmed/Bloomberg

Muddy Waters LLC, the short seller that’s being sued by Olam International Ltd. for defamation, offered to pay to get the commodity trader’s debt rated as it sticks to its contention the company is in danger of failing.

Investors will benefit from the rating of Olam’s public debt by Standard & Poor’s, Muddy Waters said in a statement yesterday. Olam, the world’s second-largest rice trader, has boosted its capital expenditure plans since Muddy Waters first criticized the Singapore-based company on Nov. 19 and that has increased its risk of failure, the research firm said.

“Olam now has no good reason to avoid having its debt rated,” Muddy Waters said. “Should it continue to refuse a rating, investors should wonder whether the company is worried that a rating would mortally wound it by making clear that the market has been underpricing its risk.”

Chief Executive Officer Sunny Verghese, who has rejected Muddy Waters’ comments, bought 1 million Olam shares at S$1.54 ($1.26) apiece today, lifting his holding to 4.67 percent, according to a regulatory filing. The company also said today it acquired Dehydro Foods Ltd., a processor of dehydrated onions and herbs in Egypt, for $30.8 million.

Olam, whose debt isn’t rated by any agency, has the equivalent of $5.8 billion of debt outstanding, of which $2.89 billion is in bonds, according to data compiled by Bloomberg. The yield on its S$500 million of 6 percent bonds due October 2022 rose 21 basis points to 9.37 percent, according to prices compiled by Bloomberg, gaining for a fourth straight day.

Defamation Suit

The commodity trader’s shares gained 1 percent to S$1.575 at the close in Singapore. The stock has declined 9.5 percent since Block first questioned the company’s finances and accounting practices at a London conference.

Olam, also one of the world’s top three coffee traders, has sued Muddy Waters and its founder Carson Block for defamation in a Singapore court. Verghese has dismissed the claim that the company could collapse by pointing to more than S$10 billion of liquidity on its balance sheet.

The company has the option of accepting Muddy Waters’s offer on the bond rating before 5 p.m. Singapore time on Dec. 5, the Los Angeles-based research firm said.

Muddy Waters rated Olam a strong sell in a 133-page report this week, likening it to failed energy trader Enron Corp. Houston-based Enron lost $68 billion in market value from its 2000 peak to filing for bankruptcy in 2001.

Muddy Waters also questioned whether Olam’s management, including Verghese, had pledged shares in the company for loans.

‘Not Transparent’

“Mr. Verghese refused to answer a question about share pledges on a recent conference call, so management’s motivation for its fierce salvo against Muddy Waters is possibly not transparent,” Muddy Waters said.

Aditya Renjen, Olam’s general manager of investor relations, didn’t immediately respond to a voicemail on his mobile phone for a comment on the Muddy Waters statement.

Olam is using its auditor Ernst & Young “to deflect questions about its accounting,” Muddy Waters said in its latest report.

“We stand by our audit opinions on the consolidated financial statements of Olam,” Ernst & Young said in a letter to Olam’s board issued Nov. 22. Ernst & Young said it was unable to comment further today.

Muddy Waters also refuted Verghese’s claim, made at a press conference in Singapore on Nov. 28, that it was working in concert with hedge funds.

Temasek Support

Muddy Waters values Olam on a “liquidation basis, because our opinion is that it is likely to fail,” the research firm 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, it said.

Olam isn’t planning any impairment charges as a result of the report, Verghese said yesterday. The company is getting support from shareholders, including Singapore’s Temasek Holdings Pte, as well as customers, he said.

“I am grateful that they have stood by us,” Verghese 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.”

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.

Block, Muddy Waters’s research director, said he had “shorted” Olam, seeking to profit by selling borrowed shares now and buying them back later at a lower price.

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.

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