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Olam Should Reduce Debt While Increasing Transparency, Dee Says

Olam CEO Sunny Verghese
The offer will address “lingering doubts,” according to Olam CEO Sunny Verghese, which was sparked by Muddy Waters claim that the company is at risk of collapse. Photographer: Munshi Ahmed/Bloomberg

Olam International Ltd., the commodity trader that Muddy Waters LLC said may fail, should reduce debt and increase transparency, according to Michael Dee, a former senior managing director at Temasek Holdings Pte.

Shares in Olam, the world’s second-largest rice trader, fell for a second day in Singapore yesterday, declining 4.3 percent to S$1.45, the lowest since April 1, 2009.

“Olam’s immediate priority should be to reduce their debt relative to equity, become cash-flow positive and increase transparency,” Dee said in a phone interview yesterday from the city-state. He worked at Temasek, Singapore’s state-owned investment company, from 2008 to 2010.

Olam announced this week it would sell as much as $1.25 billion of bonds and warrants to existing shareholders, with Temasek, its second-largest shareholder, agreeing to buy any rights not taken up by other investors. The offer will address “lingering doubts,” according to Olam CEO Sunny Verghese, which was sparked by Muddy Waters claim that the company is at risk of collapse.

Dee called for Olam to sell stock, instead of issuing bonds, in an article in Singapore’s Business Times newspaper yesterday, saying “the supply of cheap debt is over.”

“Excluding the costs of the warrants attached to the bonds, the yield will be about 13 percent instead of the 8 percent that Olam would like investors to believe,” Dee said in the interview. “The market place hasn’t really understood what the real costs for the company are.”

Olam Bonds

Financing costs for Olam have risen since Nov. 19 when Carson Block, research director and founder of Muddy Waters first questioned the company’s accounting methods. Its $500 million of 5.75 percent notes due September 2017 were yielding 9.259 percent yesterday, almost 280 basis points higher than Nov. 19, after reaching a record 10.28 percent Nov. 30.

Olam, also one of the world’s top three coffee traders, on Dec. 3 said it will offer $750 million in bonds and as much as $500 million in warrants. Temasek, which holds 16 percent of Olam according to data compiled by Bloomberg, “made its own independent assessment” before deciding to back the sale, it said in a separate statement the following day.

“We’ve stated the logic, the rationale, the strategy of why we’ve taken this particular course of action,” Aditya Renjen, Olam’s general manager of investor relations, said by phone yesterday. “The objective from our perspective was to have something in both equity as well as debt, and for the benefit of our long continuing shareholders.”

Olam has enough capital for the next 12 to 18 months even if it’s unable to raise money from the capital markets, Anantharaman Shekhar, an Olam executive director, said Nov. 28.

Expensive Debt

“The latest Temasek-backed transaction raises significant issues, as it is extremely expensive debt and equity capital, capital that Olam spent a week telling the market it didn’t need,” said Dee in the article. “Muddy Waters is not the issue here, it is Olam’s strategic and financial decisions that have brought this situation to a head.”

“It’s definitely expensive debt to raise,” said Vincent Fernando, an analyst at Religare Capital Markets in Singapore. “It sort of highlighted fears that were raised by Muddy Waters in terms of the company needing capital. A few days before it seems like the company indicated it was not needed. I think this is where it has backfired a bit.”

Olam was unchanged at $1.20 in New York over-the-counter trading yesterday.

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