Temasek’s support for Olam fails to alleviate refinancing concerns

The Singaporean investment fund’s explicit backing for Olam’s bonds and warrants may be insufficient to boost confidence in the long term, especially as the company may struggle to pay debt maturing next year.

  • 05 Dec 2012
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Olam International’s announcement that it will raise capital with the backing of Temasek Holdings is a short-term fix and may not be enough to stop eroding investor sentiment, according to analysts.

The coffee and cocoa supplier said on December 3 that it had enlisted the support of the Singaporean state-run fund to help it raise about US$1.2 billion from the sale of US$750 million in bonds and US$500 in warrants if exercised. The sale would provide a strong vote of confidence from its strategic investor, according to a statement released by the company.

The need on Olam’s part to send a signal of confidence to the market comes as the company is under fire from short-seller Carson Block’s firm Muddy Waters, which accuses it for shabby accounting practices and soaring debt. Olam filed a lawsuit in Singapore against Muddy Waters for defamation, according to Bloomberg.

In response to Olam’s announcement of its capital raising plans, Muddy Waters put out a statement on December 4 saying that such plans “validates our thesis that Olam is in danger of failing” and that it was “days away from collapsing.”

But despite Olam’s efforts to exhibit the strong support they have received from Temasek, the company may still faces challenges in paying debt due next year.

“They have a lot of debt to be due in the next 12 to 18 months. The question is whether this exercise will totally restore the confidence of the banks towards the company. There might be some banks who are not willing to rollover the debt, so it’s not like they are totally out of the woods,” according to a Hong Kong-based senior credit analyst. “If the banks don’t rollover the debt, they will have to raise more money.”

According to data provided by Dealogic and Morningstar, the company has short-term debt of SGD600 milion (US$493 million) and a US dollar-denominated convertible bond worth US$19.2 million due next year. Olam had formed a joint venture with the Gabon government to invest US$1.3 billion in a Greenfield fertiliser plant in Gabon, as well plans to invest US$236 million to build palm plantations.

Part of the Singapore dollar-denominated debt was offered by ANZ and Standard Chartered Bank. JPMorgan, DBS, Credit Suisse and HSBC will fully underwrite the upcoming capital raising. Temasek, who is Olam’s second-largest shareholder, will also subscribe to its pro-rata entitlement of the rights, but it will also take up 100% of the rights that are not subscribed by existing shareholders.

Muddy Waters said in a December 4 statement published after Olam’s announcement that the cost of raising new debt is likely to be over 10%, which will make the new debt more expensive. Muddy Waters estimates that Olam will need to refinance up to SGD4.6 billion in the next 12 months to stay afloat.

“This raise is likely only a portion of what it needs to make it one more year,” said the Muddy Waters statement.

The drop in confidence has been reflected in Olam’s bonds trading in the secondary market, according to the analyst. The US dollar bonds maturing in 2017 were trading at 88/90 before it announced its plans to raise capital, and bond prices rose to 93/95 after. It opened at 90/92 in the morning of December 4, but has since retreated to 88/91.

“At these levels, they are not cheap. There is room for it to weaken further,” said the analyst. “Yields should be trading higher than current levels of 8%.”

The Muddy Waters statement added that Olam’s plans to raise financing undermines confidence in the company because CEO Sunny Verghese said that it would not tap the markets for at least five months.

“The fact that earlier, management had said that they don’t need to do any raising and that they have sufficient liquidity for the next 12 -18 months now becomes a bit hollow,” according to James Koh, an analyst at Maybank Kim Eng Securities. “This erodes investor confidence on a longer-term basis.”

Muddy speaking the truth?

The analyst said she also agreed with certain accusations placed by Muddy Waters, including criticism over their accounting methods.

“They’ve been quite aggressive in doing their accounting. I think a quite a number of points can be thought of as valid. But of course, we definitely need more than what management does. It’s really up to them to come and defend themselves. If they don’t, it will probably send a negative signal to the market.”

Olam’s plans to take on aggressive acquisition and capital expenditure strategies can further hurt their liquidity, said Maybank Kim Eng’s Koh.

“They are in a huge capex stage. They have a pretty liquid inventory but at the same time that is part of the working capital for the company. If they reduce that working capital, it will hurt their business. They still plans to invest, but far as we know, the capex phrase is pretty heavy,” said Koh.

“The risk is that the leveraged levels are still pretty high. Arguably, it’s always been this high but now that Muddy Waters is making some pretty sensational allegations, the leverage factor is still quite significant. The M&A strategy is also a risk given that it’s in so many countries.”

Olam’s debt to Ebitda is 7.64 compared to the industry average of 1.64, according to Morningstar. Maybank Kim Eng estimates that debt will rise from SGD7.4 billion to SGD8.2 billion by financial year 2014.

  • 05 Dec 2012

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1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
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5 Deutsche Bank 20,416.10 78 4.61%

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1 Citi 15,985.59 61 11.10%
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3 HSBC 11,482.63 54 7.98%
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5 BNP Paribas 7,314.81 22 5.08%

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5 Citi 95.36 35 5.16%

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1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
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4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

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1 AXIS Bank 6,343.17 130 18.89%
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4 Standard Chartered Bank 2,372.20 33 7.06%
5 ICICI Bank 1,992.51 54 5.93%