Wednesday, December 12, 2012

Olam Bonds worth buying?

Got this email from my swiss bank 2 days back. Anyway, this is their takeaway from mgmt meetup. My own gut feel is if I have $250k to spare and taking this type of risk, I would rather go and buy a $500k-$800k condo and wait it out. My risk appetite is not that big on financial instruments that is out of my control. I'd rather risked it on a property.

Our team met the management of OLAM yesterday. Among other things, the following issues were discussed and wish to share with you, hopefully to address some of the concerns  you may have on its recent headlines: 1.    Why did OLAM announce a bond cum right issue, instead of re-considering/cutting capex for  next year
a.    The bond issues was a short term tactical measure designed to rebuild confidence and to end all speculations that OLAM could be running out of funds or liquidity. Even thought this was not the case, the management acknowledged that these things can take its own dynamic and a loss confidence can be very damaging
b.    Board saw an immediate necessity to “bridge the confidence gap”
c.    Temasek has effectively written a ‘put’ on OLAM’s debt
d.    The capex program is under review will be discussed between now and February and changes be done. This is not something which could have been decided over the weekend- nor would such a knee jerk reaction have been either credible or a service to its shareholders and stakeholders. OLAM realizes that as a growing and FCF (free cash flow)-negative company it is vulnerable to these kind of attacks and intends to reduce its vulnerability
 2.    Why this complicated exercise to raise cash?
a.    With these 750 mio, OLAM will have no more funding needs well into 2014
b.    The  main shareholders (Family, Temasek, Verghese) didn’t want to be diluted – OLAM had committed at the last rights issue to shareholders that no new shares would be issued for 4 years. With the new warrant structure, the new shares will only be exercised in 2016 (keeping that commitment)
c.    Still: the board recognizes the need to treat all shareholders equally (as Temasek had signed its willingness to take up the whole issue), hence the rights that give all shareholders the ability but not the obligation to be on the same footing as Temasek.
d.    The cost of the new bond (IRR 8%) is to put the deal on a commercial basis for Temasek. Temasek is NOT giving free money to OLAM. Temasek will also be taking an additional cut in the underwriting fee for the issue.
e.    The new bonds are coming out at a yield of ~8%, around the current levels for Olam papers. In the short run this does provide a new reference rate for Olam papers)
 3.    Leverage
a.    OLAM is having the lowest leverage ratio since listing at the moment
b.    Short term financing is fully collateralized and consists of trade finance for merchandise which is to 80-90% already contracted
c.    OLAM has a 90 days average inventory turn. Per month the company delivers ca. 1.2 Bn SGD of goods, which then settles the lines with banks. In the last few weeks as the crisis has unfolded, lines have been repaid and redrawn with no changes to conditions
d.    No bank has pulled any line or renegotiated the conditions
 4.    Rating
a.    Rating has never been necessary, as OLAM as so far addressed pools of funds of investors which know the company well.
b.    Other companies in the same are not rated either (most prominent: Louis Dreyfus)
c.    Singaporean companies issuing  bonds seldom get a rating as they are well known within its potential investors
 5.    Acquisitions
a.    Sometimes good will is build, but sometimes assets get revalued, namely when company successfully turn around businesses it buys.
b.    MW pictures in the report are misleading and do not depict OLAM assets or operations
c.    Out of 40 acquisitions2 didn’t deliver the expected result and where shut down/written down. This has been clearly documented
 6.    Dealing with MW
a.    OLAM has being dealing with main stakeholders on a daily basis since the “crisis” started
b.    Main shareholder incl. Temasek and Family have fully supported the company and the rights issue
c.    OLAM will desist from reacting to each and every comment from MW, as the intent is clearly to create panic and the 133 report content very little facts
d.    OLAM is suing MW for slander/libel in Singapore High court. It has evidence that MW has been selling the report to hedge funds already in May. At the same time short positions started to increase. This raises the potential for ‘insider’ trading and market manipulation – given the current investigation into hedge fund activity in NY this is likely to run as well.
e.    MW also deliberately misled public by announcing a 80 pages report and then delivering 1 days later a 133 pages one (manipulation)
 All in all, this was a heavy crisis for OLAM according to CEO Sunny Verghese. The company realizes that as a public company, having a growing profile, complex accounting in different countries and a negative free cash flow, you make yourself vulnerable for short seller like MW. The company will work hard to reduce piece by piece this vulnerability. It will eventually also become FCF(free cash flow) positive earlier than planned (2016) and thus start creating shareholder value. The company has always been and is profitable, running an operating cash flow of 500 Mio SGD per year. Some thoughts The explanation on why the debt issue cum warrants makes sense to me. if confidence goes, the company goes (especially a leveraged one). At the same time OLAM understand that the markets started to get some issues with its strong and aggressive growth and it complexity. The commitment to reconsider its huge capex is an important step in the right direction. The fact that Temasek and Kewalram group supports bond and right issue fully significantly reduces risk for bondholders for at least well into 2014. I don’t think the bonds will trade up to the old levels so quickly, as they have to reflect a higher level of risk. The shares are another story and will move in function of how quickly OLAM intends to be profitable. As of this moment too speculative to make a proper assessment  However, I think the 6% 2018 in SGD (offered at 91 for 8% Yield)  could be a good carry for diversified portfolios for the next 12  months, looking for a high yielding bond but for clients who have the risk appetite and believe in the company.  The yield offered compensates for the (headline) risks to come Happy to discuss in greater details with you at your convenience and appreciate your thoughts you may have/share with me.  Below are the list of Olam’s outstanding bonds and price indications for your reference: CCY    Issuer                                                  Cpn     Maturity                       Bid       YTW    Offer   O YTW           SGD    OLAM INTERNATIONAL LTD          4.070   12/2/2013                    99.10   9.50     100.00 4.01SGD    OLAM INTERNATIONAL LTD          3.000   25/2/2013                    99.00   8.01     100.00 2.97SGD    OLAM INTERNATIONAL LTD          2.500   6/9/2013                      95.50   9.01     97.00   6.78SGD    OLAM INTERNATIONAL LTD          6.000   10/8/2018                    89.50   8.36     91.50   7.89SGD    OLAM INTERNATIONAL LTD          5.800   17/7/2019                    85.65   8.70     87.85   8.22SGD    OLAM INTERNATIONAL LTD          6.000   25/10/2022                  83.65   8.48     85.85   8.11SGD    OLAM INTERNATIONAL LTD          7.000   Perp                            79.15   13.68   82.85   12.35USD    OLAM INTERNATIONAL LTD          5.750   20/9/2017                    89.65   8.43     90.95   8.07USD    OLAM INTERNATIONAL LTD          7.500   12/8/2020                    92.00   8.96     93.50   8.68USD    OLAM INTERNATIONAL LTD          6.000   15/10/2016                  85.50   10.70   87.50   10.00 

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