Yesterday, Olam announced that they would be doing a rights issue. The structure of the Olam Rights issue is a bit special as it is asking shareholders to purchase Olam bonds together with call warrants.
Most people would understand the term rights issue to mean the offering of new equity stake in the form of shares to existing shareholders.
Companies that wanted to issue bonds could simply get buyers from the open market and not go through the hassle of a rights issue.
The timing of the fund raising is also a bit unexpected as Olam had said that they do not need to tap the debt market only last Thursday.
Olam not looking to tap debt markets for at least 5-6 months (29 November 2012)
In a matter of days, they have changed their mind and even managed to get Temasek Holdings to underwrite the entire rights issue.
I was actually quite surprised that Temasek Holdings can decide (within a couple of days) to not only agree to take up their rights entitlement, but they have also committed to subscribe for all bonds and warrants that are not taken up.
“We have invested in Olam over the years. We are supportive of its publicly known strategy to take the opportunity, in recent years, to add on more upstream and midstream capabilities and capacities. While no business is without risks, we remain comfortable with Olam’s credit position and longer term prospects, and are pleased to have another opportunity to invest in the company, alongside other shareholders,” Temasek’s Senior Managing Director, Investments, Mr David Heng.
Olam Rights Issue
Under the renounceable underwritten rights issue, US$750 million 6.75% US$ denominated bonds due 2018 will be issued together with 387,365,079 warrants. Each warrant gives the owner the right to subscribe for 1 new share in the Company during the exercise period at a price of US$1.291.
If all the warrants are exercised, that will raise another US$500 million for Olam.
The full details of the Olam rights issue can be found here:
The bonds will be issued at US$0.95, a 5% discount to the face value. This means the cost of debt is in excess of 7% p.a. Ouch. Can Olam’s return on capital exceed this cost of funding?
As the US$ bonds might not appeal to many of the retail investors here, I suspect Temasek could very well end up with most of the bonds from retail investors.
While their support of Olam could help to instill some confidence back into the company, it might appear that they are getting a raw deal as similar Olam bonds had been trading at yields way in excess of 7% in the secondary market after the Muddy Waters allegations came out.
Of course, there are greater stakes involved and Temasek has chosen to increase their bets in the face of mud slinging by Muddy Waters.
It will be an interesting battle, but one which Temasek cannot afford to lose. If they lose this one, the public uproar will be huge (Which is another reason why I cannot understand how they can decide so quickly on this one).