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This OLAM versus Muddy Waters

The latest soap opera on the Singapore stock investing scene have been this guy Carson Block from Muddy Waters saying OLAM balance sheet is weak and it’s a good short target.

OLAM CEO came out with a comprehensive defense saying that they are at least $10 billion dollar liquid, because a lot of their commodities asset can be liquidate instantly.

Muddy Waters issued a 133 page (!!!!!) report on OLAM.

OLAM decide to sue Muddy Waters, saying they are working with hedge funds to short OLAM.

Both have agendas

At this point, I do not know what to make of this. I am really bad with commodities so shall not comment much. I have not look at their balance sheet but if you trust most people say, and what you know about commodities companies, they have their fair share of debts.

All we can deduce is that both of them have agendas.

Muddy Waters agenda is that they are short bias.

Olam agenda is that they are long bias.

I do not know whether who is right, time will tell. This sounds so much like the BP case where it could have been a great buying opportunity.

Olam announces USD $750 million rights issue of bonds, warrants

And what happen today? Olam announces that they will be issuing a mixture of bonds and warrants underwritten by Temasek, which holds 16 percent stake in Olam

Each warrant carries the right to subscribe for 1 share at an exercise price of USD $1.291 (about SGD $1.57) , on a basis of “313 bonds of principal amount of USD $1.00 with 162 warrants for every $1000 existing ordinary shares”

Now this strikes me as odd. If you are that liquid, then why the heck do you want to raise capital?

This looks like forcing the shareholders to take sides and show of strength that the debt market have confidence in them.

It could also be another way of Temasek trying to bail out another company in their stables.

The bonds are not rated, but if they are they would likely be rated as JUNK, since their existing bonds in the market are > 10% yield currently.

Note that these bonds are issued as 95% of par, and since par coupon is 6.75%, the effective yield is approximately 7.75%.

That looks good, but a few things.

The high yield indicates the level they approximate the risk the market demands of them. It probably tells that Olam is of a certain high risk.

Secondly, if you are an investor, would you rather buy the bonds currently yielding >10% yield then to subscribe to this at 7.75% yield???

It is likely the underwriter Temasek will end up with a big chunk.

Another note: The insiders the Kewelram family and Sunny Verghese have not given an undertaking to take up their respective shares of the rights. Why the heck is that? Does this mean they are more shrewd or Temasek is more shrewd?

Temasek involved with another mess again

It seems that Temasek time and again are intertwine with companies that are complicated. This is a world renowned sovereign fund and seems like their investment assessment skills prefers complicated companies like this.

To me, linking to Temasek doesn’t mean much now. This case, and the investment in international investment banks shows that Temasek are poor market timers or really poor valuers.

Olam won SIAS 2012 Most Transparent Company awards

And another candidate that won it in the past under Temasek’s stable was China aviation oil, and we all remember how it turned out (to be fair Temasek bailed them out)

Honestly, why do SIAS keep coming up with these award when the past winners do not measure up to our perceived transparent standards.

Not vested in this.


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Wednesday 5th of December 2012

hi rama, this right issue is never intended for retail investors. It mainly is to show confidence from Temasek. Retail investors just get a ride along with Temasek. That's why if a retail investor does not like it, Temasek is more willing to take all.

Olam can't do a straight equity fund raising, that would: 1. prove Muddy Water is right that Olam needs fund raising so desperately; 2. increase Olam's operation cost. The cost of equity is so high, even the hybrid structure is not any cheaper.


Wednesday 5th of December 2012


I reworked the numbers (the calculations on previous post are wrong). Theoretical ex-rights price is essentially a small discount to pre-rights price (eg. today's close is S$1.60; ex-rights is around S$1.59) and can increase slightly upto 5-8% depending on where the shares trade. Basically nothing of great significance here other than acamedic curiosity (or for someone trying to arb the rights and underlying shares - not my cup of tea).

After some deliberation though, i think the offering is a negative for shares.

1. Raising money - this is the bottom line 2. Why not raise straight debt instead of forcing shareholders to cough up more money? - the motive seems to be tactical one ie., to force short sellers out. it is not driven by business imperatives => managment trying to act 'smart' nd not sure whether it was worth the risk - if they have to raise the money anyway they should have chosen straight equity rights offering. This way atleast the bondholders will be placated and cost of debt would have been lowered. instead what we now have a situation where they are forcing equity sharesholders to stump up money, hold instruments that many could have issues with (mandate restrictions in holding debt securities)and finally end up with a half assed solution that would not appease debt holders across the curve (short duration bond holders would rejoice but i would worry for long tenors ones like perpetuals.. havent looked at the seniority of the bonds yet).

My conclusion is that it was an ill-advised gamble on the part of the company to drive short sellers away. Clearly it didn't work today and thus has the potential to backfire. I would think conventional rights offering - leaving aside egos - would instead have been the right prescription.



Tuesday 4th of December 2012

There is never strong conviction that Olam is a fraud in Muddy Water's report. Most within the report just show that Olam is financially weak and probably mismanaged. Conclusion that Olam is a fraud are mostly Muddy Water's opinion, rather than facts.


Tuesday 4th of December 2012

hi f, Muddy Waters seem to paint them in a very negative way, but somehow i feel its due to how Olam defended themselves. but Muddy Waters look like snobbish vultures.


Monday 3rd of December 2012

Hey Drizzt

Have you worked out the theoretical rights price here? complicated becuase of the bond/warrants componenets but wanted to check calculations with someone.. i am getting theoretical ex-rights share price of S$1.277 and warrants price of S$1.319. any thoughts?



Tuesday 4th of December 2012

hi Rama, so sorry as i didn't look deeper into this. yes it does sound complicated but perhaps you can put how you come up to those figures out? the warrants seem to price at current trading price no?


Monday 3rd of December 2012

Hi Drizzt,

Muddy Waters "ONE" : Olam "ZERO"...


Tuesday 4th of December 2012

hi AK71, you finally come back.

its too early to know. perhaps time will ease all the Olam mistake. a > 10% yield looks attractive then.

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