Wednesday, November 28, 2012

Muddy Waters vs Olam

Only just got the chance to read the ST today and found this on page B19. Earlier this morning around 9 am I responded to someone who sent me this, "(BN) Olam Nears Distress as Muddy Waters Takes Aim: Corporate Finance"

"If the type of accusations Muddy Waters had made against Olam were untrue, within a few hours Olam should be able to shoot several holes into into the report. We should be able to see a brief response followed by a more thorough one later debunking Muddy Waters. It hasn't happened. Olam to me is toast."

You don't have days! I am underwhelmed by our fund managers. You better up your game. Just as well I don't buy their funds.

Around 1 pm Olam's made available their rebuttal on their website. I only read the first 15 pages of Muddy Waters report but scanned through more than half of Olam's rebuttal paying special attention to their solvency and capex.

As I am not a full time investor, I would avoid them. Something tells me that Muddy Waters had caught them too soon. Come back a couple of years or more later you might find a crime. Too early, too soon Muddy.

In the short term Olam is not going belly up. Bond holders with near term maturities are safe.

Olam Nears Distress as Muddy Waters Takes Aim: Corporate Finance
2012-11-27 22:40:12.976 GMT

     (For more credit market news, click on TOP CM.)

By Shruti Date Singh and Sridhar Natarajan
     Nov. 28 (Bloomberg) --- Bonds of Olam International Ltd.
are approaching levels considered “distressed” after research
firm Muddy Waters LLC likened the world’s second-largest rice
trader to Enron Corp. and said it’s likely to fail.
     Olam’s unrated $500 million of 5.75 percent, five-year
notes issued at par in September have tumbled to 86.5 cents on
the dollar to yield 9.3 percent, according to prices compiled by
Bloomberg. Yields on speculative-grade bonds worldwide have
contracted 0.2 percentage point in the same period, Bank of
America Merrill Lynch index data show.
     Muddy Waters, founded by short seller Carson Block, rated
Singapore-based Olam a strong sell in a 133-page report
published yesterday. The research firm says Olam uses non-cash
accounting gains to boost its earnings, has been “burning cash”
and will need to raise or refinance as much as S$4.6 billion
($3.8 billion) of debt over the next year to remain solvent.
     “There is just a lot of uncertainty around the name and I
think right now simply nobody knows whether Olam or Muddy Waters
is right,” Markus Bossard, a money manager at Mirante Fund
Management SA, said in a phone interview from Zurich. The firm
oversees about $440 million in its funds, including Olam’s debt.
     Bonds yielding 10 percentage points or more over U.S.
benchmarks are considered distressed; five-year Treasuries yield
0.66 percent.

                       Conference Comments

     The yield on Olam’s bonds are closer to the 11.2 percent
average for debt rated CCC than the 6.36 percent for securities
graded one tier higher at B, according to Bank of America
Merrill Lynch indexes.
     Average yields on junk-rated notes, ranked below Baa3 by
Moody’s Investors Service and lower than BBB- at Standard &
Poor’s, are 7.04 percent, after reaching an all-time low of 6.84
percent on Oct. 18, according to the Bank of America Merrill
Lynch U.S. High Yield Master II index.
     With borrowing costs on speculative-grade debt hovering at
about record lows, the number of companies in the Bank of
America Merrill Lynch U.S. High Yield Distressed Index has
declined to 237 from 1,475 at the height of the credit crisis
four years ago.
     Block first publicly questioned Olam’s accounting methods
on Nov. 19. He told an investment conference in London that he’d
“shorted” the company’s stock, seeking to profit by selling
borrowed shares now and buying them back later at a lower price.
The 5.75 percent notes dropped 7.2 cents to 89.8 cents on the
dollar on Nov. 20, Bloomberg prices show.

                          Olam Lawsuit

     Muddy Waters published a statement on its website about
Olam on Nov. 20. Block’s remarks were malicious falsehoods, Olam
said in a lawsuit filed in the Singapore High Court on Nov. 21.
     Briony Mathieson, an Olam spokeswoman, declined to comment
on the company’s bond performance and said the company is
reviewing the Muddy Waters report. Olam said in a statement
yesterday that after an initial read, the reports’ allegations
have no substance.
     The shares dropped 9.8 percent to $1.19 in over-the-counter
trading in New York yesterday. They have declined 10 percent in
Singapore since Block first talked about his short position.
     Olam supplies 21 products from cocoa to rubber from 65
countries to 12,300 customers. It’s one of the world’s top six
cotton traders. Singapore’s state-investment company Temasek
Holdings Pte. is Olam’s second-largest shareholder with a 16
percent stake, according to data compiled by Bloomberg.

                       Acquisition ‘Binge’

     The company runs the risk of failure because of an
acquisition and capital expenditure “binge,” Muddy Waters said
in its report. Most of the deals the firm said it researched are
“low-quality assets that appear to bring little more than
cosmetic benefits to Olam,” according to the report.
     “It is instructive to view Olam through the lens of failed
U.S. trader Enron,” Muddy Waters said in the report. “There
are a number of material similarities in the way their
businesses developed, and their actions.”
     Enron, once the world’s largest energy trader, plunged into
bankruptcy in December 2001 following revelations it was using
off-balance-sheet vehicles to hide billions of dollars in losses
and inflate its share price.
     Olam spends on assets and records non-cash accounting gains
“with the possible result being -- as in Enron Corp.’s case --
the asset quality becomes less important than the potential to
recognize accounting gains,” Muddy Waters said in the report.

                         Operating Cash

     Non-cash accounting gains were 37.9 percent of profit after
tax from fiscal 2010 to 2012, according to the report.
     Of Olam’s S$1.1 billion cash position at the end of its
fiscal year on June 30, S$602.1 million appears to come from
Olam withdrawing margin from brokerage accounts, Muddy Waters
said. Olam “seems” to have had only three weeks’ operating
cash at the end of the period, Muddy Waters said.
     “The problem is it’s been burning cash the entire time
it’s been public, almost,” Block, the director of research for
Muddy Waters, said yesterday in an interview with Stephanie
Ruhle and Tom Keene on Bloomberg Television’s “Market Makers.”
     Muddy Waters said it estimates the present value of Olam’s
unsecured bonds at 14 to 33 cents on the dollar.
     Olam said in August it’s targeting annual profit after tax
of $1 billion by 2016, partly through acquisitions. Net income
in the year through June fell 14 percent to S$370.9 million.

                           Olam Deals

     Chief Executive Officer Sunny Verghese said in a Nov. 26
interview that he stood by Olam’s debt-funded expansion and said
it’s not in the best interest of shareholders to abandon
spending plans. Olam’s net debt of S$6.4 billion at the end of
fiscal 2012 was more than double the level four years earlier.
     The company has announced acquisitions totaling at least $2
billion in the last five years, Bloomberg data show. Olam has
spent S$571 million less on acquisitions than announced while
S$996.2 million has gone towards unattributed, non-acquisition
capital expenditure, according to Muddy Waters.
     “Bondholders in particular should be asking where their
money goes,’ Muddy Waters said.

For Related News and Information:
Olam’s risk profile: OLAM SP Equity RSKC
Olam’s financial analysis: OLAM SP Equity FA1
Olam’s capital structure:: OLAM SP CAST
More corporate finance columns: NI CF

--With assistance from Michelle Yun in Hong Kong and Simon Casey
in New York. Editors: Simon Casey, Faris Khan


1 comment:

  1. Actually Olam has issued a very detailed and good rebuttal to most of Muddy Waters' accusations.

    There are still lingering doubts though as to the accounting of negative goodwill and the economic viability of Olam's past M&A spree.

    Muddy Waters also interestingly did not raise the question of what if one strip out non-cash earnings from EBIT figures, how would Olam fare?

    I believe if you are a bond investor, looking at Olam from an EBIT picture with non-cash earnings stripped out, Olam would look terrible.