Muddy Waters letter blasts Olam debt as more details awaited

SINGAPORE - Muddy Waters stepped up its battle against Olam International Ltd with a letter criticising the Singapore commodities trader's debt and cash burn, while investors took the latest salvo in stride.

Shares of Olam rose as much as 5.6 per cent on Wednesday, rebounding from a 7.5 per cent fall the previous day. Olam bond prices briefly rose too, as traders and analysts said the letter was not as scathing as previous, formal research reports issued by the well-known short-seller.

"The detailed report is still not out yet," said a Singapore trader about Olam's stock rebound. The trader was not authorised to speak publicly. It is unclear if Muddy Waters will publish a formal report on Olam or not.

The tussle began on Monday, when Muddy Waters founder Carson Block was speaking at a charity event in London. Block singled out Olam's accounting practices, saying his firm was unable to reconcile the company's capital expenditures with its announced projects, and questioned its prospects.

Muddy Waters, which makes money by betting against companies, has issued devastating reports in the last few years, mainly aimed at China-based companies. Some of the reports crushed shares of the targets, although others were able to recover.

Olam responded on Tuesday with a strong defence of its business, assuring that it could fund operations for 18 months even if it were shut out of the debt markets, and promising to consider share buybacks after the drop in its stock price.

Muddy Waters said in its letter, dated Nov. 20 and published on the research portion of its website, that the firm believed Olam would collapse.

"Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached," said the relatively brief letter, addressed to Olam's CEO and its board.

Olam did not have an immediate comment on the letter on Wednesday. On Tuesday, the company called Block's attack"baseless and unsubstantiated".

DEBT, CASH BURN

This was not the first time accounting was questioned at Olam, which is 16 per cent owned by Singapore state investor Temasek Holdings.

In February 2011, Olam denied there were inaccuracies in its accounts after a CLSA analyst raised concerns about internal controls, citing multiple and sometimes significant differences between Olam's audited and unaudited statements.

Muddy Waters cites the 2011 CLSA note in its letter.

"Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion ($1.63 billion), and c) cumulative operating cash burn by approximately S$500 million," the letter says.

Olam has $4.125 billion of outstanding debt, including bonds and loans, according to Thomson Reuters CreditViews. The bulk of its bonds are held by retail investors who can be quick to unload paper, making for volatile prices.

Olam's bonds were trading steady on Wednesday, but caution was still in the air as prices are off the levels prevailing before the Muddy Waters allegations.

The bonds due in 2017 were last seen at 93-94.5 cents on the dollar and 2020s were at 94.5-96, both recapturing more than half their losses at the previous day's lows. Before the allegations surfaced, the bonds were at 98 and 101, respectively.

The stock was up 2.5 per cent at $1.65 on Wednesday, losing part of its early bounce. The previous day it had fallen as much as 11 per cent to $1.545, its lowest in nearly six months.

Olam's shares are down about 20 per cent so far this year, while the benchmark Straits Times Index is up 12 per cent.

Olam has grown from its origins in Nigeria into a diverse agricultural commodities trading company with interests ranging from cocoa and coffee to nuts and sugar.

Chief Executive Sunny Verghese has led an expansion that has seen it take on larger commodity players such as Noble Group and Wilmar International.

Muddy Waters may not be the only firm betting against Olam, which is the most borrowed stock among Singapore's top 30 companies, suggesting heavy demand from short sellers.

Nearly 80 per cent of Olam's shares that can be borrowed were out on loan, compared with an average of about 6 per cent for the index constituents, according to Markit Securities Finance.