Olam plays Temasek card with rights issue of up to $1.52b

SINGAPORE - l am played its Temasek trump card yesterday against the onslaught by short-sell research firm Muddy Waters, unveiling a rights issue that will raise up to US$1.25 billion in capital.

The rights issue will consist of up to US$750 million (S$914 million) in five-year bonds, to be accompanied by warrants that will raise up to US$500 million upon conversion.

While the deal is fully underwritten by Credit Suisse, DBS, HSBC and JP Morgan, Olam has gone the whole hog by adding another layer of underwriting.

Temasek, which owns about 16 per cent of Olam, has thrown its weight behind the commodities-trading firm, not only committing to take up its pro-rata entitlement of the rights, but to also sop up 100 per cent of the rights not subscribed to by existing shareholders.

At a hastily called briefing for media and analysts last evening, Olam's bankers turned out in full besuited force as its chief executive Sunny Verghese gave a presentation on the deal and attempted to send a message to the markets and to Carson Block, the Muddy Waters man shorting his firm's stock.

Mr Verghese said: "We wanted to address the pressures on the equity side with the short positions, as we all know. There's (also) pressure on the bonds side. We believe that this decisive, bold, large issuance should arrest any lingering doubts that anybody has about anything to do with our liquidity or solvency position. This is fairly unprecedented in Temasek's history... to underwrite a bond issuance (as) Temasek is an equity house (and) looks for equity returns. It reflects their confidence in our strategy and our ability to execute that strategy."

He stressed that the capital-raising exercise was not about liquidity, but more about creating a "liquidity buffer" to offset debt.

"Even if we do not raise this capital, we have ample liquidity to run our business," he said.

All in, the sums raised will be enough to cover the firm's debt obligations for the whole of FY2013, if it comes to that.

The fully renounceable deal is structured in such a way that, for every 1,000 shares an investor has, he will be able to exercise his right to 313 bonds with a face value of US$1 each.

Those bonds are in turn "stapled" to 162 warrants carrying a conversion price of US$1.291, effectively the closing price of Olam's shares on Nov 30 at S$1.575.

These warrants can only be exercised three years after their issue date - in 2016 at the earliest.

Olam's trading was halted all of yesterday.

The bonds, carrying a 6.75 per cent cash coupon, will have an issue price of 95 US cents or 95 per cent of face value, giving someone who exercises them an effective yield of 8.08 per cent.

After two years, Olam will have the option of redeeming all its outstanding bonds.

This show of strength comes at a time when the firm's stock has been pummelled to three-year lows and its bond prices have tumbled more than 20 per cent.

Mr Block's damning Muddy Waters report released last week had valued Olam at "liquidation basis", estimating the present value of its unsecured bonds at "14 to 33 cents on the dollar".

Mr Verghese said: "We hope we will be able to remove the nervousness in terms of where our bond prices are trading now and the pressure on our bond prices. We also believe that this will be supportive of our equity."

He refused to comment on the implications of this deal for short-sellers like Mr Block, but there is precedent from 2009, during which an HSBC rights issue was so appealing that the bank's shareholders were compelled to recall the shares they had lent to short-sellers.

Post-deal, where gearing ratio is concerned, the company expects little change in the short term.

It now has five-year equivalent bonds issued at 5.75 per cent; they are trading at about 10 per cent, he said.

The new five-year bonds, with an effective yield rate of 8.08 per cent, will have a relatively lower cost.

As this deal is fully renounceable, shareholders have the option of taking up the offer or renouncing their right to them.

Those who renounce their right will get a certain value for them in the market.

Any dilution will happen in 2016, the earliest the warrants can be exercised.

If all of them are exercised, total dilution will be about 16 per cent.

The deal will be finalised by end-January if Olam does not need to hold an extraordinary general meeting (EGM) to approve Temasek's being paid an underwriting fee; it will be finalised by end-February if an EGM is needed.

Asked why Olam did not opt for a straight equity rights issue, Mr Verghese said: "We didn't want any current dilution in the next three years. We wanted to do an issue which will give us equity three years out, which is when we will need additional equity."

He conceded that retail investors may not understand the implications of such a deal structure, and that it may have to be explained to them.

On average, private banking clients make up 60 to 70 per cent of the takeup at the issuance of its bonds; institutional investors account for the rest.

Mr Verghese, who has a 4.7 per cent stake in Olam and 15 million unexercised options, intends to exercise the full extent of his rights for the issue.

This bombshell of a deal follows several rounds of repartee between Muddy Waters and Olam.

The research firm had issued a 133-page report questioning Olam's solvency and business model, urging a "strong sell".

Olam replied with a 45-pager decrying Muddy Waters' claims as "meritless".

Muddy Waters then issued a challenge to Olam, offering to pay for the latter's debt to be rated by Standard & Poor's.

Mr Verghese reiterated yesterday that Olam had no immediate plans to get its debt rated.

"(Mr Block is) very focused on conserving cash. Our advice is for him to continue doing that," he said.

He refused to take questions about whether he had pledged his personal stake in the firm, as he was trying to separate his personal shareholding from the company.

In a separate interview after the briefing, he refused to comment on Muddy Waters' demand for an apology for having been accused of collusion with other hedge funds.

Asked if it could be taken that no apology was forthcoming, he said, with a touch of steel to his voice: "Yes, you can take (it as) that."