Olam’s Bond Sale Only Delays Collapse, Muddy Waters Says

Carson Block
Carson Block, research director and founder of Muddy Waters LLC., said in a June 2011 report the company overstated its assets. Photographer: David Paul Morris/Bloomberg

Olam International Ltd.’s planned $1.25 billion sale of securities will only postpone the likely collapse of the commodity trader, according to Muddy Waters LLC, the research firm led by short-seller Carson Block.

The sale of a record $750 million in bonds and as much as $500 million of warrants announced yesterday “validates our thesis that Olam is in danger of failing,” Muddy Waters said today in a response to the raising that’s backed by Temasek Holdings Pte, Singapore’s state investment company.

Olam, the world’s second-largest rice trader, and Muddy Waters have engaged in a public war of words since Block, a 36-year-old former lawyer, said last month said he was selling Olam shares short -- borrowing them to profit by buying them at a lower price later. Olam Chief Executive Officer Sunny Verghese, who sued the research firm and Block on Nov. 21 in the Singapore High Court, described the sale as a vote of confidence from Temasek and showed its ability to get funding.

“More than anything this move is to give comfort to the market, to get that confidence back up,” Tanuj Shori, a Nomura Holdings Inc. analyst based in Hong Kong, said by phone. “This issue may take time to resolve because it’s too subjective.”

Shares of Olam, also one of the world’s three largest coffee traders, climbed 1.6 percent to S$1.60 at the close of trade in Singapore. The stock has declined 8.1 since Block made his initial allegations on Nov. 19.

Bonds React

Olam’s $500 million, 5.75 percent notes due September 2017 rose to 88.4 cents on the dollar today from a record low of 83.2 cents Nov. 30, according to prices compiled by Bloomberg. The bonds were quoted at 97 cents on the dollar Nov. Olam’s planned sale of bonds, announced yesterday, would be its largest public issue to date, according to data compiled by Bloomberg.

The debt sales raise questions over whether Olam was running short of cash in recent days, Muddy Waters said. Olam’s associate general manager of investor relations Hung Hoeng Chow said she couldn’t immediately comment on the allegation.

Temasek, Olam’s second-largest shareholder, agreed to buy any of the $1.25 billion in bonds and warrants not taken up by other investors. Credit Suisse Group AG, DBS Group Holdings Ltd., HSBC Holdings Plc and JPMorgan Chase & Co. will underwrite the transaction in full, Olam said.

“This is a strong vote of confidence we are seeing from Temasek, our long-term strategic shareholder,” Olam’s Verghese said at a press conference in Singapore yesterday. “This transaction also demonstrates the ability to access both debt and equity capital markets, even in current conditions.”

Position Reversed

The capital raising was also a “180-degree reversal” of Olam’s earlier position on not raising more debt in the near future, Muddy Waters said. The agricultural commodities trader has six to eight months before failing due to its unsustainable debt position and cash burn, Block said today in an interview on CNBC.

Olam will need about S$3.5 billion of fixed capital in the next four years, 40 percent of which would come from equity derived from retained earnings, and 60 percent from new debt, Verghese said Nov. 28. The company won’t issue any new equity, he said.

The $1.25 billion offer is aimed mainly at repaying borrowings and addressing any “lingering doubts” about Olam’s liquidity, Verghese said. It is not a sale of equity, which minimizes dilution, and is about removing “nervousness” from around the company’s bonds, he said.

Minimize Dilution

“Because it’s not an equity rights offer, it minimizes current dilution, which is one of the boundary conditions,” Verghese said. The company has “sufficient equity for the current horizon, which is up to 2016,” he said.

The management’s intention with the capital raising is to relieve pressure on refinancing debt due in the next year and set a lower 8 percent benchmark yield for the debt market, said James Koh, an analyst with Maybank Kim Eng, in a note today.

The move may hurt short-sellers because scrip lenders will have to call for borrowed stock in order to participate, Koh said. Still, it undermines management’s earlier stance that it could easily survive 12-18 months even in a credit market seizure, the analyst said, cutting Olam’s rating to sell from hold.

Olam, whose debt isn’t assessed by any ratings company, has the equivalent of $5.8 billion of debt outstanding, of which $2.89 billion is in bonds, according to data compiled by Bloomberg.

Muddy Report

Muddy Waters said in a 133-page report last week that it valued Olam on a “liquidation basis, because our opinion is that it is likely to fail.” The research firm said Olam had committed a number of “accounting gaffes” over the years and will need to raise or refinance as much as S$4.6 billion of debt over the next year to remain solvent.

Olam, which counts Ernst & Young LLP as its auditor, is using the firm to “deflect questions about its accounting,” according to Muddy Waters.

Separately, the Ontario Securities Commission yesterday alleged Ernst & Young failed to conduct its audits of now-insolvent Chinese tree-plantation operator Sino-Forest Corp. in accordance with accounting industry standards.

The tree-plantation operator, which was a target of Muddy Waters, slumped 74 percent before eventually filing for bankruptcy protection in March. Ernst & Young yesterday agreed to pay C$117 million ($118 million) to settle claims in a Canadian class action suit against Sino-Forest, in the largest settlement by an auditor in Canadian history.

Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Kewalram Singapore Ltd. is Olam’s top shareholder with a 20 percent stake, according to data compiled by Bloomberg.

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