Olam International Ltd. (OLAM), the commodity trader that short-seller Carson Block said might fail, is selling as much as $1.25 billion of bonds and warrants to existing shareholders in a transaction backed by Singapore’s state-owned investment company. The stock surged.
Olam will offer $750 million in bonds and as much as $500 million in warrants, the Singapore-based company said late yesterday in a statement. The city-state’s Temasek Holdings Pte, Olam’s second-largest shareholder, agreed to buy any rights not taken up by other investors, Olam said.
“This is a strong vote of confidence we are seeing from Temasek, our long-term strategic shareholder,” Chief Executive Officer Sunny Verghese said at a press conference in Singapore. “This transaction also demonstrates the ability to access both debt and equity capital markets, even in current conditions.”
Block, a 36-year-old former lawyer, first said on Nov. 19 that he was selling Olam shares short -- borrowing them to profit by buying them at a lower price later -- and said the company was at risk of collapse. Olam said it faces no risk of insolvency and sued the research firm and Block on Nov. 21 in the Singapore High Court, calling the comments malicious falsehoods.
Olam’s debt rose after the announcement, with the price of $500 million of its 5.75 percent bonds due in September 2017 jumping 7.5 cents yesterday to 91 cents on the dollar, according to BNP Paribas SA prices. They were little changed today as of 9:15 a.m. in Singapore, the prices show. The bonds closed at 97 cents on Nov. 19, the day Block first made his allegations.
Its Singapore-traded shares climbed as much as 8.6 percent, the most since June 11, to S$1.71. Olam was up 6 percent at S$1.67 as of 9:30 a.m. local time.
Temasek’s support for the debt offer amounted to a temporary bailout by the Singaporean investment company, Block said today in an interview on CNBC. “This would be a situation where Temasek had to choose between bad and worse,” he said, adding Olam probably had six to eight months before failing due to its unsustainable debt position and cash burn.
Credit Suisse Group AG, DBS Group Holdings Ltd., HSBC Holdings Plc and JPMorgan Chase & Co. will underwrite the transaction in full, Olam said.
The offer will be aimed mainly at repaying borrowings and will address any “lingering doubts” about Olam’s liquidity, Verghese said. The deal will remove “nervousness” about the company’s bonds, he said.
“Because it’s not an equity rights offer, it minimizes current dilution, which is one of the boundary conditions,” Verghese said. The company has “sufficient equity for the current horizon, which is up to 2016,” he said.
Olam is the world’s second-largest rice trader and one of the world’s top three coffee traders. Verghese has dismissed the claim that the company could collapse by pointing to more than S$10 billion of liquidity on its balance sheet.
“We are unlikely to be committing this capital for additional fixed capital investments,” Verghese said. “We are going to be treating this capital that we are going to raise more as a liquidity buffer. It will take care of all the repayments that are due till about early 2014.”
Olam, whose debt isn’t assessed by any ratings company, has the equivalent of $5.8 billion of debt outstanding, of which $2.89 billion is in bonds, according to data compiled by Bloomberg.
Muddy Waters released a 133-page report that said Olam may fail and likened the company to failed energy trader Enron Corp.
Muddy Waters said in its report it values Olam on a “liquidation basis, because our opinion is that it is likely to fail.” The research firm said Olam had committed a number of “accounting gaffes” over the years and will need to raise or refinance as much as S$4.6 billion of debt over the next year to remain solvent.
Olam, which counts Ernst & Young LLP as its auditor, is using the firm to “deflect questions about its accounting,” according to Muddy Waters.
Separately, the Ontario Securities Commission yesterday alleged Ernst & Young failed to conduct its audits of now- insolvent Chinese tree-plantation operator Sino-Forest Corp. in accordance with accounting industry standards.
The tree-plantation operator, which was a target of Muddy Waters, slumped 74 percent before eventually filing for bankruptcy protection in March. Ernst & Young yesterday agreed to pay C$117 million ($118 million) to settle claims in a Canadian class action suit against Sino-Forest, in the largest settlement by an auditor in Canadian history.
Olam was founded in 1989 in Nigeria by the Kewalram Chanrai Group as an export company to secure foreign currency, according to Olam’s website. Kewalram Singapore Ltd. is Olam’s top shareholder with a 20 percent stake, according to data compiled by Bloomberg.
Houston-based Enron lost $68 billion in market value from its 2000 peak to filing for bankruptcy in 2001. The company, once the world’s largest energy trader, plunged into bankruptcy in December 2001 following revelations it was using off-balance- sheet vehicles to hide billions of dollars in losses and inflate its share price. More than 5,000 employees were fired and about $1 billion in retirement money was lost.
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