When the water is muddy, the price is relatively lower. However, as the water gets clearer, the price will rise simultaneously. I prefer muddy water (not Muddy Waters) as the return will be higher and I have the ability and willing to assume the higher risk.

Warren Buffett once said, “Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.” Although not everyone subscribes to this philosophy, I do and I have benefitted a great deal from it.

Heavy ownership by retail investors, who are attracted to the high yield, make Olam bonds especially volatile. Olam 2020s are nearly half-owned by retail investors and 2017s have 70 percent retail involvement. During the MW and Olam saga,the bonds are in very distressed state. Hence the main idea behind the fund-raising plan is to " break the negative cycle" of high bond yields filtering through to the equity market. Part of this proceeds will be used to pay up the 2013 maturing bonds. The rights issue will be a short-term positive for the stock as echoed by most analyists.

 

Olam bonds are unrated. The interest rates paid by these bonds go up as the risk rises. That should be your first red flag. If a bond offers an interest rate that is way off the market, it is because there is a high degree of risk involved. Another factor that correlates to default is the bond’s length to maturity. The longer a bond hangs out there the higher the risk of default. This makes sense when you think about it. The longer a bond issuer is exposed to market or economic factors, the greater the odds are that something bad will happen.   Moody’s Investors Service and Standard & Poor’s are the two premiere bond-rating services. If one of these services does not rate a bond, I would  pass  it. Whether bond or stock,I would rather wait for the dust to settle   before committing otherwise ended up holding a lemon.

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.

I am in agreement with Michael Dee's analysis. Olam is a very leveraged global commodity trader in the world and that is a fact. It does not need more debt. It needs equity. Olam wants to compare itself with Louis Dreyfus for not having a credit rating but Olam has significantly more borrowings from the bond market compared with Dreyfus, which is a bigger group, still privately owned and less complicated. There are several ways to de-lever, raise more equity, retain more profits (cut dividend) and build equity or sell assets and repay debt, just like Mr Dee proposed.

Even after this bonds rights issue, I would speculate that banks will continue to demand more favourable terms. Banks are not charities, they would not want to lend on the same terms as bond investors who will reap 8-10% and still rank pari passu. Remember there is NO new equity until 2016 earliest.

You think selling of Olam is merciless? Try checking out the price to tangible book of Archer Daniel Midlands, Bunge, Cargill and you will find they are much cheaper, less leveraged, have a simpler business model and a cleaner balance sheet.

The short sellers have done their covering in the days when share price was below 1.45 and volume was very high. It is Temasek which is chasing the price higher in recent days. Olam is a drop in the bucket in Temasek's $200 billion portfolio. It took two months for the price to drop from $2 to $1.40 so let's see how long it takes for the price to climb back up to $2.

A rising tide will lift all boats, a well-known investor once said. Next year, and perhaps 2014, is bullish for risk assets, if you believe in the 7-year cycle. Shanghai Composite Index went beyond 6000 in the last cycle when all boats were lifted. Where is it now? Are short sellers to be blamed?

Short sellers have done their research in great detail before they act. One recent example is Autonomy. Jim Chanos first mentioned it in 2009. In 2010 he said he is short. In 2011 when HP paid US$10+ billion for it, he said short HP. In Nov 2011, HP wrote off US$8.9 billion of the acquisition and HP's shares hit a 10-year low. Is Jim Chanos to be blamed for HP's demise?