Re: Olam
10-point plan of tough love for Olam
It needs to restore credibility and take definitive actions for a healthy future
Published December 07, 2012 COMMENTARY
By Michael Dee
1) End the war of words. Anyone reading Muddy Waters' 133 page report will see a credible work of research. The market has not been impressed with Olam's attempts to discredit Muddy Waters with ad hominem attacks and lawsuits. What's needed now are strong actions, not words.
2) Raise equity, not more debt. Olam made a strategic error in saying equity was not needed until 2015. It needs equity now. Its net gearing of 248 per cent is well in excess of industry norms and the US$750 million new debt makes matters worse and adds USD/SGD foreign exchange risk to boot. Olam should cancel the egregiously expensive debt issue and execute a meaningful equity rights offering giving the KC Group, Temasek and management the opportunity to take up rights that are unsubscribed, if any. This will underpin Olam's equity capital while demonstrating the commitment of its largest shareholders and management. Selling 13 per cent debt with at-the-money warrants is a sign of desperation.
3) Immediately stop the capital expenditure programme. This is essential as the supply of cheap debt is over. Olam's board must stop the acquisitions, conserve cash and prove the value of the acquisitions to date.
4) Focus on generating positive cash flow as soon as possible. Rule No 1 of battlefield triage is to stop the bleeding. Negative cash flow while executing a capex and acquisition programme with ever increasing leverage is untenable.
5) Sell secured receivables. Olam has said that its secured receivables are as good as cash. It should demonstrate that by selling a meaningful amount, raising cash, paying down short term debt, creating liquidity and convincing the market of these receivables' cash-like properties.
6) Draw down a portion of both committed and uncommitted bank lines. Olam is currently closed out of the fixed income capital markets and the availability of its undrawn, fully committed and uncommitted facilities remains in question. In light of Olam's significant upcoming 2013 debt maturities, showing the availability of committed and uncommitted facilities would boost market confidence.
7) Get the debt rated. Olam has raised billions from the Singapore debt markets with no independent rating of creditworthiness. An independent assessment of Olam's credit is required for investors, many of whom are individuals. The argument that others in the industry do not have a rating is untenable and specious. Olam's net gearing of 248 per cent far exceeds Noble's at 107 per cent and Wilmar's at 88 per cent. The MAS and SGX, whose silence have been deafening, should also publicly back this initiative.
8) Do not buy back stock. A stock repurchase programme burns valuable cash, increases leverage and will not impact Olam's share price. In fact, it would likely only further worsen the precipitous declines in its bond and preferreds prices.
9) Declare if management shares are on margin or pledged. While in the past, it could perhaps be argued that this is a personal matter, with so many questions hanging over the company, management needs to treat its shareholders as partners and declare if any shares are encumbered and could be force-liquidated at a given price point and if so, what that is.
Olam should also disclose the timeline of the events leading up to the announcement of the Temasek underwriting as the storyline has been shifting. Olam claimed this was its idea over the weekend and had the bankers take it to Temasek. Yet Olam also said last Friday that the CEO and two board members bought significant shares in the company. Did the idea emerge after those purchases were made and if so, when and how? There is no need to have questions about possible conflicts of interest when a simple timeline can put the issue to rest.
10) Don't rely too much on Temasek in future. Too often the market believes that when Temasek is invested for over 15 per cent, they will underwrite problems that occur and banks, investors, management, and boards can then get sloppy and lazy. As a professional investor, Temasek will do what is in its commercial interest and those who bet on additional bailouts may one day have a rude awakening, as has happened in the past. The US$750 million debt and warrants package is one sweet deal for Temasek and is not being done for charitable reasons.
Olam, as a trading business, has failed to grasp the realities of the post-financial crisis era. Today balance sheets, accounts and financing must be beyond reproach. Olam has not achieved this, but has continued to travel a dangerous path in recent years fuelled by readily available credit. It has a fiduciary responsibility to its equity and debt investors to respond with a credible and thoughtful plan of action to preserve and enhance value.
Olam has paid an extremely dear price to Temasek to buy some time. How it proceeds from here will be the existential question.
Michael Dee, an investment banker for over 30 years, was Morgan Stanley's regional CEO in Singapore and a Senior Managing Director of Temasek Holdings from August 2008 to April 2010. He has no position in any Olam securities.
