Olam Shares Hit New Low on Criticism of Bond Issue

Beleaguered commodity trader Olam International

, which has been under fire from short seller Muddy Waters, fell to its lowest level since April 1, 2009 in trading in Singapore overnight. Olam was roundly criticized in an editorial written by Michael Dee, a former senior managing director at Temasek Holdings, the Singapore government-owned investment company that is Olam's second largest shareholder, published in The Business Times, Singapore's leading business daily newspaper. “Olam's immediate priority should be to reduce their debt relative to equity, become cash-flow positive and increase transparency,” Dee said in a phone interview today with

from Singapore. Although Olam CEO Sunny Verghese said that the company wanted to issue debt rather than dilute existing shareholders, Dee said that Olam should issue equity instead of debt. This echoes a statement by Muddy Waters, which said that they would reverse their negative view of Olam if the company were to raise $3 billion in new equity. “Excluding the costs of the warrants attached to the bonds, the yield will be about 13 percent instead of the 8 percent that Olam would like investors to believe,” Dee told Bloomberg. “The market place hasn't really understood what the real costs for the company are.” After vehemently denying that it would need any new capital in the near-term, Olam announced a US$750 million bond issue with $500 million in warrants on December 3. The debt and equity will be offered to existing shareholders and Temasek has agreed to purchase any debt or warrants that are left unsold. Olam CEO Verghese said that the new capital would address any “lingering doubts” about the viability of the company following the release of Muddy Waters' highly critical report. For its part, Olam says that it has enough capital for the next 12 to 18 months, even without the new bond and warrant issue. “The latest Temasek-backed transaction raises significant issues, as it is extremely expensive debt and equity capital, capital that Olam spent a week telling the market it didn't need,” Dee wrote in his Business Times article. “Muddy Waters is not the issue here, it is Olam's strategic and financial decisions that have brought this situation to a head.” In the meantime, investors are losing confidence in Olam's shares and debt. “Financing costs for Olam have risen since Nov. 19 when Carson Block, research director and founder of Muddy Waters first questioned the company's accounting methods,” Bloomberg wrote. “Its $500 million of 5.75 percent notes due September 2017 were yielding 9.259 percent today, almost 280 basis points higher than Nov. 19, after reaching a record 10.28 percent Nov. 30.” Olam may find it even more difficult and expensive to raise additional capital given the sharp public criticism from Dee, a highly respected, former senior manager at Temasek. Most of Olam's shareholders are Singapore-based retail investors. They may decide that discretion is the better part of valor after reading Dee's opinion of Olam in today's Business Times.