IFR issuer profile: Olam

IFR Asia, October 2009

Across debt, equity and lending, Olam has been one of Asia’s most active issuers and borrowers in 2009.

It all stems from a change in long-term strategy. Singapore-based Olam is active in agricultural commodities – it is, for example, the world’s largest supplier of cashew nuts and among the leaders in cocoa, cotton, teak and rice – and its model is to be involved across the supply chain wherever it’s profitable to do so, from the farm gate to the consumer. It has so far done this with a very asset-light model, which works roughly like this: a predictable 2% net profit margin on an average of three times asset turnover, net debt equity of about three to one, equating to roughly 24% return on equity.

CEO Sunny Verghese says that the change in funding approach accompanies the latest six-year corporate strategic plan for the company, announced in August 2009, which seeks to increase the company’s intrinsic value fourfold over that timeframe. Doing that under the existing model would mean a dramatic increase in the scale of the business, the total capital and equity. “We said that doesn’t make sense, particularly if our view of the future is of a potentially capital constrained world with sub-par growth,” says Verghese. Instead, he intends to reach the target by increasing margin profiles. The group’s acquisition of over 8,000 hectares of almond orchards and water rights in Australia from Timberland for A$128 million in September is an example: it pushes Olam upstream to a higher margin business. “We’re trying to find upstream opportunities in locations where we believe growing a commodity will have a sustainable cost advantage,” he says.

Verghese says that doing this will change the capital structure from its position today, with 82% in current assets such as inventory and receivables, versus 18% in bricks-and-mortar fixed assets, to potentially a 60-40 or 65-35 split. “We will therefore need more long term money than in the past, which is the reason we went down the various capital raising initiatives we executed.”

The first of these was a US$300 million equity raising from Temasek, the investment arm of the Singapore state. Next came a convertible bond, which raised US$400 million and was upsized by a further US$100 million (again in a placement to Temasek) in early October. And alongside that, Olam has raised US$540 million of three- and five-year amortising loans. Add to that some short term Islamic money and “in the last two-odd months we have raised about US$1.016 billion of equity, seven year and five year money, and US$424 million of short term funding,” says Verghese. “That gives us quite enough financial flex to execute our plans over the next three-year cycle. It also signals to the market that it is quite unlikely we will do additional equity or equity-linked financing in the next three years,” though he says “on the debt side there could be more, particularly on the long end.”

The convertible issue, the first seven-year convertible from an unrated issuer anywhere in the world, was a little fraught. Lead managers JP Morgan and Standard Chartered went out aggressively, offering a yield to maturity of 5.4% and a conversion premium of 28%. Unfortunately, Verghese says, the leads had assumed that stock borrow on Olam shares could be achieved at about 2% – yet when it came to the deal the stock borrow appeared to have dried up and what little was available was going for at least 4%, thus ruining the mechanics of the deal. “Typically the hedge funds and convertible arb funds that come in at the beginning stayed away because they couldn’t hedge their equity exposure, as the stock borrow was not available,” Verghese says. “We found no traction available so had to make a mid-course correction.” They didn’t want to budge on size or tenor so the yield went instead, up to 6%, with the conversion coming down to 25%. On top of that, the managers effectively put their own fee in and offered the bonds at 98, giving an effective yield of 6.3%. “We received an overwhelming response and it got lapped up,” says Verghese – but the leads made no money on it. Perhaps due to that sacrifice, Verghese makes great effort to be charitable about the leads, saying “they managed that process extremely well” and that the behaviour of both the bond and the stock borrow since then suggests that they were actually right about the market, just stymied by temporary instability.

Olam is a Temasek favourite: the sovereign wealth fund was involved pre-IPO, sold out at a handsome profit, and has now come back in again, reflecting the agency’s desire to play a more active role in commodities. “We definitely welcome them, not just for their financial involvement but their active involvement in the board,” says Verghese. “It’s mutually beneficial.”