Temasek’s commitment to take up unsubscribed rights a big positive.
Olam
has announced a rights issue that could potentially raise up to US$1.25b.
With this rights issue, Olam would secure 5-year tenor debt funding of US
$750m, which will help extend its debt maturity and liquidity profile. We
believe this move will allay the fears of more investors regarding the risk
of insolvency of Olam, particularly with Temasek’s commitment to take up
100% of rights not subscribed.
We re-iterate BUY with unchanged target
price of S$2.20, pegged to 12x FY13 EPS.
Olam announced a renounceable underwritten rights issue comprising US$750m
6.75% US$ denominated bonds due 2018 with 387m free warrants with each
warrant carrying the right to subscribe for 1 new share. If converted, Olam
can raise another US$500m of proceeds.
Up to US$1.25b may be raised:
· Bonds (senior unsecured) can raise up to US$750m. The maturity is 5
years with 6.75% cash coupon, and issue price is 95%.
· Warrants, which upon conversion, can raise up to US$500m. The tenor is 5
years, and non-exercisable for 3 years. Up to 387m shares may be issued
upon conversion, representing 16.2% of existing share capital.
A shareholder with 1000 Olam shares has the right to subscribe:
· 313 bonds of face value of US$1 each
· 162 warrants issued at strike of US$1.291
Post listing, the bond and warrants will be detachable and traded
separately.
Olam said that the effective bond cost is 8.08% (or US$61m) per annum,
which factors in the 6.75% coupon and the 5% initial discount. This is 13%
of our forecast FY14 S$554m interest expense. Whilst this may be higher
than the cost for past debt fund raising, it is lower than if Olam were to
raise debt today (post Muddy Waters’ report) without such a structure.
Whilst we note that the bond issue will not lower Olam’s gearing, it is a
positive as it extends the debt maturity. If the warrants are converted,
this will lower Olam’s gearing, but conversion is not possible for the
first three years.
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