Tuesday 4 December 2012

Olam International Limited

OCBC on 4 Dec 2012

Olam International Limited (Olam) is planning a rights issue consisting of US$750m worth of 5-year bonds with a 6.75% coupon (but effective yield closer to 8% due to 95% issue price) with stapled warrants (up to US$500m if fully converted at US$1.291 each after three years). Besides being fully underwritten (by Credit Suisse, DBS, HSBC and JP Morgan), Temasek Holdings will not only undertake to subscribe to its pro-rata entitlement of the rights, but the sovereign fund is also committed to take 100% of the rights not subscribed by existing shareholders. While we think that there could be some near-term boost to its share price, we note that the outlook for the next six months remains quite muted. As such, we are maintaining our HOLD rating and S$1.44 fair value for now.

Rights issue of bonds with stapled warrants
Olam International Limited (Olam) is planning a rights issue consisting of US$750m worth of 5-year bonds with a 6.75% coupon (but effective yield closer to 8% due to 95% issue price) with stapled warrants (up to US$500m if fully converted at US$1.291 each after three years). The bonds and warrants will be offered as one package, fully renounceable, until fully paid and listed; but post listing, the bond and warrants will be detachable and traded separately. Each board lot of 1000 shares will get 313 bonds of face value of US$1 each and 162 warrants. 

Vote of confidence from Temasek
Besides being fully underwritten (by Credit Suisse, DBS, HSBC and JP Morgan), Temasek Holdings will not only undertake to subscribe to its pro-rata entitlement of the rights, but the sovereign fund is also committed to take 100% of the rights not subscribed by existing shareholders. According to Olam, the move is a “strong vote of confidence” and also demonstrates the company’s continued ability to access both equity and debt capital markets under current market conditions. Last but not least, Olam believes the proceeds will further strengthen its balance sheet and liquidity – management intends to use part of proceeds to repay existing bonds and also reduce debt, thus keeping its net gearing little changed; but it stresses that none will be used for fixed investments.

Hopes to shore up bond and share prices
In a nutshell, management hopes that the confidence boost will help to dispel any lingering doubts about its viability and solvency, and thus shoring up its bond and share prices. While we think that there could be some near-term boost to its share price, we note that outlook for the next six months remains quite muted. As such, we are maintaining our HOLD rating and S$1.44 fair value for now.

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