New Olam bonds reassuring but could erode future profit

Higher coupon rate means higher borrowing cost.

"While this new liquidity access has indeed eased some concern over Olam’s near-term repayments, the new bonds come with a higher coupon rate, and therefore higher borrowing cost which could erode the company’s future profit. Many shareholders would rather see Olam offload some of its many questionable assets to raise funds instead. Maybe a tomato processing factory or a flourmill dotted around the 60-odd countries it operates in," said IG Markets in its SIngapore evening update.

The agribusiness giant had announced a new bonds-with-warrants rights issue, which will be fully backed by the sovereign wealth fund Temasek, a move that IG Markets considers "the big gun" in steadying the ship that has been rocked by the Muddy Waters and Carson Block controversy.

"For a while traders warmed to the state backing as Olam’s share price rocketed more than 8% before falling back to end the day 1.6% higher at $1.60," said IG Markets.

"It was a small wonder Olam didn’t ask for another trading halt while CEO Sunny Verghese tied his shoes. Instead the shares traded freely as shareholders digested its latest attempts to quell market fears about its liquidity," IG Markets added.

"Carson Block must be rubbing his hands with glee having rattled Olam’s cage enough for it to launch such a fund-raising venture. Block called it a 'bailout,' But he faces tough opposition in Temasek which has decided to come out fighting for Olam. After all it does own a 16% stake in the commodity player and to walk away now would crystalise some big losses," IG Markets said further.

IG Markets also considers the possibility of easing pressure on Olam shares. "With zero stockpiles of Olam shares left in SGX’s central depository available for lending, traders are guessing whether the downward-selling pressure caused by this Muddy Waters/Olam spat is ending," it said.