SINGAPORE - Olam International asserted yesterday that it faces no risk of insolvency, saying that Muddy Waters had got it wrong.
"The assumptions and conclusions drawn on our solvency position are incorrect," said Olam.
Muddy Waters had done up its own calculations - including making the assumption that all current loans without any given maturity dates mature in the fourth quarter of 2013 and first quarter of 2014.
On the strength of such assumptions it had concluded that "Olam may have to raise or refinance $4.6 billion in debt in the next 12 months to stay solvent".
"Combined with a highly leveraged balance sheet, record low operating margins and continued capital expenditures and acquisitions, Olam runs a high risk of financial ruin," it said.
The research firm compared Olam to Enron, and said that it valued Olam on a liquidation basis "because our opinion is that it is likely to fail".
Olam reiterated yesterday that it had sufficient liquidity to meet its debt obligations as well as its current business and future investment plans.
As at Sept 30, it had $8.55 billion in long-term debt and equity, covering fixed assets of $4.5 billion, it said.
"We believe we have more than enough capacity to meet our repayment obligations of $1.5 billion in the next 12 months, as well as our likely capex of $1-1.25 billion in the same period."
It also has unutilised short-term bank lines of $4.5 billion to finance ongoing working capital needs, it added.
Olam's banks have remained supportive of the firm thus far, said executive director for finance and business development A Shekhar.
"We've an extremely strong show of support from all our bankers, whether they're a tier 1 bank or a tier 2 bank, and we're grateful for that."
In its report, Muddy Waters had also questioned the "substantial amounts of cash" that Olam withdrew from its margin accounts and overdrafts at the end of the 2012 financial year.
"We suspect that Olam drew down its margin accounts just before the end of the quarter in order to appear more liquid than it really is," the US research firm said.
Commodity firms such as Olam typically hedge against fluctuations in commodity prices by using futures contracts, for which they have to post a margin - usually a percentage of the contract value - with its brokers.
Olam said that a drawdown in the margin accounts with its brokers can only be done when there is excess cash available with its brokers, which occurred as commodity prices had dropped against their short position on the exchange.
"(Muddy Waters' claim) shows a lack of understanding of how a hedge account actually works," it said.
The overdrafts are routine short-term working capital loans, it added.
"These loans are drawn by our subsidiaries in local currencies to avoid exposure to foreign currency fluctuations, and are held for very short periods in the nature of 'cash in transit' to fund on-going operations."
Interest rates on these could range from one to 22 per cent, and would be a function of the devaluation rate in the local currency too, it said.