Martin Lee @ Sg
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More on Olam Rights Issue

Olam’s rights issue drew an immediate response from Carson Block’s Muddy Waters.

Muddy Waters Calls Temasek-backed Olam Fund-Raising a ‘Bailout’ (CNBC)

Stop-Gap Bailout of Olam Validates MW’s Thesis (Muddy Waters Research)

Video of Carson Block (Muddy Waters) on CNBC

Olam has given the following clarification:

Further to media reports regarding the process of the recently announced rights issue, Olam International Limited (“Olam”) would like to clarify the following:

1. On Saturday December 1, Olam requested one of its leading international investment banks to take an investment opportunity to Temasek aimed at reducing uncertainty about Olam in both the bond and equity markets.

2. Three additional investment banks were then invited to participate as joint book runners, lead managers and underwriters (“JBLMs”). The JBLMs are Credit Suisse (Singapore) Limited, DBS Bank Ltd., HSBC and J.P. Morgan (S.E.A.) Limited.

3. Temasek made its own independent assessment on the investment merits of this transaction and decided to support it.

4. The JBLMs confirm that there was no mention of any concern regarding Olam’s credit position in their discussions with Temasek.

We believe that this is a strong and positive transaction that will serve the interests of all our continuing stakeholders.

The market does not seem to be very impressed with the price of the stock falling back to levels before the rights issue was announced.

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7 comments
Nicholas says 6 years ago

Hi Martin

This ‘war’ between Olam and MW has been going on for quite a few weeks. While the share price dropped about 15% and recover on good news at times, the bond prices (especially those maturing in 5 yrs or more) seems to be trading around 80 or low 80s. Normally, shouldnt bond prices suffer less than share prices?

By the way, may I ask, from your view, do you think the bond price will recover soon? What actually needs to happen in order for the ordeal to be over and bond price to return to near normal values of around 100? Any key events that you think investors should look out for? Thanks! Hope to hear from you.

Reply
    Martin Lee says 6 years ago

    Dear Nicholas,

    There are a few factors.

    1) Bond investors in Olam tend to be the institutional investors.
    2) A fund that invests into bonds will have a lower risk mandate compared to an equity fund, so they have to manage the risk more actively.

    Consider the allegations by Muddy Waters. If it turns out to be true and Olam fails, bond holders will lose a huge chunk of their money, while equity holders will lose everything.

    Unless an institutional investor has a very strong conviction on the company, it is easier for him to reduce his holdings than to do nothing.

    If he sells and nothing happens eventually, the manager can explain that he is reducing the risk.
    If he does nothing and Olam really fails, he will have a lot of explaining to do and perhaps even lose his job.

    Given that there are few buyers of Olam bonds now, any significant selling will drive down the prices.

    Equity prices might be supported (on the buy side) by speculators, short covering, etc. Nevertheless, the downward pressure is still stronger unless a major short covering takes place.

    If there is more clarity on the balance sheet (eg a large equity bailout), the bond prices (especially the shorter duration ones) will recover.

    I don’t think the ordeal will be over soon.

    Reply
      Nicholas says 6 years ago

      Dear Martin,
      Many thanks for your enlightenment and more thanks for sharing your insights. Do you think the ordeal will be near over once the rights issue details are settled and the bonds/warrants starts trading? Since by that time, the people who lend the share out would have recalled them back so MW probably has bought back the share to cover. This is just my silly idea, from a very layman perspective.

      The SGD bond that mature in 2022 and perpetual is actually trading only at around 80 now. Would you suggest one should sell it away or hold it first? I am wondering how likely is it that Olam will fail. Apart from MW, none of the analyst or hedge fund investors etc actually suggest that Olam will fail, including those that are not fullly supportive of Olam’s business model.

      Thank you Sir. Hope to hear from you.

      Reply
        Martin Lee says 6 years ago

        Dear Nicholas,

        You might want to read this article here:

        http://www.martinlee.sg/olam-bonds/

        Reply
          Nicholas says 6 years ago

          Sure thank you Sir.

          Reply
James says 6 years ago

Temasek must know what they are doing. Just yesterday as mentioned in Straits Times on page B12 that S&P retains AAA rating for Temasek & even if Temasek were to decline by 85%, its residual investments would still comfortably cover its total outstanding debt, Wow…! Temasek must be as strong as Mt Everest, right ?

Reply
    Martin Lee says 6 years ago

    Dear James,

    I think Temasek is caught in a difficult situation also.

    If they refuse to underwrite the issue, the banks will pull all the credit from Olam and it will become a self-fulfilling prophecy.

    Reply
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