Dear Obfuscate,

A rights issue of equity under the current circumstances is not about short term pain or long term gain. It is about whether Olam will raise any equity at all.

Let me ask you a simple question. If the share price is pushed below the rights issue price which is likely due to the strong momentum of short-selling at the time, assuming that you are a shareholder, would you take up your rights? Suppose the answer is a no. How is Olam going to raise more equity?

Besides, are you aware that Temasek indicated that it was not willing to support a right issue of equity?

Dear Obfuscate,

I do not agree with your view that Michael Dee’s idea of a rights issue of equity is likely to be effective under the current circumstances.

Assume that Olam launched a rights issue of equity (1 for 1) at $1.33 per share which was an approximately 10% discount off the prevailing price of $1.575 at the point when the rights issue of bonds was announced. In an attempt to discourage script lenders to subscribe to the rights issue and hence recall their scripts, short sellers would try to beat down the price to below $1.33. If they succeeded, which was likely due to the strong momentum of short-selling at the time, script lenders would have no incentive to subscribe to the rights issue as they could buy Olam shares at lower prices in the open market if they so wished. Therefore, scripts lender would not recall their scripts. As a result, the share price would be beaten down badly by short sellers and Olam would not get any equity. I, for one, would not subscribe to any rights issue of equity by Olam for the reason explained above.

It may to seem some that this problem could easily be overcome if Temasek promised to take up any unsubscribed shares. The question is would Temasek have the incentive to do so. The answer is a likely no. The reason is that if Temasek promised to take up any unsubscribed shares, in all probability, it would need to take up 100% of the rights issue of equity. Furthermore, why would Temasek promise to buy Olam shares at $1.33 a share through the rights issue of equity when it could buy them at lower prices in the open market since the price would be beaten down to below the rights issue price by short sellers?

There is no denying that Olam may need more equity at some point in time. However, is now a good time? Will doing the right thing at the wrong time get you the intended result? I would not be surprised if Temasek and Olam had anticipated the above possible scenario and that could explain why Temasek indicated that it was not willing to support a right issue of equity.

I agree with Michael Dee that Olam should issue equity. However, I beg to differ from him in terms of the timing. In my view, now is not the time.

A rights issue of equity at this point will only have a negative effect on the share price without having any significant positive effect, if any. However, although a rights issue of bonds will have negative effect on the share price, its positive effect can be as substantial, if not more. As explained above, an even bigger problem is that by launching a rights issue of equity, Olam is unlike to get any equity.

The problem with a rights issue of bonds is that it will increase the gearing. However, this effect can be reduced if some of the proceeds are used to retire old bonds. Once the share price recovers and stabilizes, Olam can then launch a rights issue of equity which will reduce the gearing. Some of the proceeds can then be used retire even more old bonds and this will reduce the gearing further.

When one is considering a strategy to deal with a problem, it is important that he takes into account the prevailing circumstances. It is important to do the right thing at the right time so that you can get the intended result.