Olam debt fears still linger

OLAM International's US$1.2-billion (S$1.5- billion) cash call lifted its shares but failed to ease concerns about the Singapore commodities firm's financial position.

This comes after its chief executive officer said only last week that it would not tap debt markets for the next five to six months.

Olam managed to get full backing from Temasek Holdings, its second-biggest shareholder, for a complex bonds-with-warrants issue to battle short-seller Muddy Waters.

The move sent its shares up by more than 8 per cent to a nearly two-week high yesterday.

But critics, including Muddy Waters and several analysts, warned that Olam needs to shore up its weak cash position after piling up debt to finance expansion.

"This rights issue has not addressed ongoing concerns regarding low margins, high leverage and the need for cheap funding amid wafer-thin 5 per cent Ebitda margins," said ANZ credit strategist Owen Gallimore.

Muddy Waters, which two weeks ago launched a scathing attack on Olam's accounting, debt and investment projects that sent its bond and stock prices tumbling - and ultimately spurred the rights-issue plan - said the move validated its thesis that the company is in danger of failing.

"Our view remains Strong Sell," it said, adding that the fund raising "merely postpones the collapse that we feel is almost inevitable".

Olam has sued Muddy Waters in a Singapore court and issued a detailed rebuttal of the short-seller's allegations, saying it was not at risk of insolvency and had enough liquidity.

Mr James Koh, an analyst at Maybank Kim Eng, said that the main idea behind the fund-raising plan is to "break the negative cycle" of high bond yields filtering through to the equity market.

The rights issue will be a short-term positive for the stock, Mr Koh said.

"However, management's earlier stance, that it could easily survive 12 to 18 months even in a credit-market seizure, may now sound hollow and minority shareholder confidence may be eroded," he added.

He cut his rating on Olam shares to "sell" from "hold" and lowered his target price to S$1.42 from $1.75.

Olam's shares closed at $1.60 yesterday.

Last week, Olam chief executive Sunny Verghese said in an interview that the company had sufficient cash and did not expect to tap the debt markets for at least five to six months.

But, late on Monday, Olam surprised the markets by announcing that it would issue a nominal US$750 million of 6.75 per cent five-year bonds at a price of 95 cents, raising US$712.5 million.

Temasek said that it also backs Olam's strategy to add on more upstream and midstream capabilities - an approach that has loaded it with debt as it bought up flour mills and dairy operations, from Nigeria to Uruguay.

OCBC Bank said in a note that it was less confident about Olam's long-dated bonds.