Olam

Olam: Possible positive sentiments admist the Muddy Waters Saga, with group flashing Temasek out as a key supporter. Grp is planning a bonds/warrant issue worth US$1.25bn. Key details as follow: 1) 5 year bonds – US$750m, coupon 6.75% along with US$500m warrants (5 yrs, exercisable after 3 yrs). 2) These are staple securities, as for warrants, subscription to bonds is necessary. It is being offered pro rata to existing shareholders 3) Strike price for warrant is US$1.29 (current price) and assuming post dilution will result in ~16% dilution (380m shares). 4) Temasek will take a pro rata share of warrants and most important, it is underwriting any warrants not subscribed to by existing shareholders. 5) These are renounceable, ie, shareholders can monetize the option value of warrants if they don't wish to subscribe to the bonds. Or they could sell the bonds later and retain the warrants as they would be traded separately Nomura note that the capital raising should take care of all capital commitments for the next 12 mths or so (this could be used for repayment purposes). The implied yield on this bond is 8% (6.75% coupon with 95% to face value), which though is cheaper than 10% yields Olam’s bonds are trading now but slightly on expensive side (for Olam). However, considering current circumstances, and mgt’s expectation that Olam’s bond yields will come down, Olam’s overall cost of borrowing (especially on short-term working capital) may not change much with time. In light of MW controversy, pressure on bond yields, and the market’s nervousness regarding access to capital markets; house believe this is a good move as it should soothe market participants on access to liquidity. This should remove overhang of near-term repayments, and in the meantime, debt capital markets should start functioning normally with respect to Olam,. Temasek’s commitment to bonds/warrants is a sign that it is standing behind Olam (Temasek stake could now go up in all likelihood). House think the market should react positively to this news.