Olam International

[specuvestor]

My assessment is simple: if Olam was lying about the credit line, would the banks stay quiet since this is now such a public affair?

As discussed, problem of Olam is over leverage and hence at mercy of creditor. And over leverage is not a simple debt to equity (check out starhub). Creditors are also at the mercy of confidence. Now it is a prisoners' dilemma: as a banker I wouldn't want to be the first to pull the rug and hence accused of causing a run (unless I'm very sure like what Merrill did to Bear Sterns), but neither do I want to be the last. So I go to the shareholders for guarantee or loan. I doubt the chairman can cough out the "confidence buffer" but the saving grace is Temasek is a major shareholder. The corporate bankers are happy that someone is holding their hands.

My feel is that post the rights issue, baring fraud, this issue will be over in the medium term and Olam has to delever. Otherwise it will haunt them again. I'm sure Temasek will be watching.

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Can some kind souls help me understand when Michael Dee talks about true cost of 13%, whose 'cost' is this? Cost incurred by Olam, and paid to shareholders? Hmm...

If (and this is a big 'if') everyone subscribes (i.e. no dilution) whatever "cost" incurred by Olam would be paid to shareholders, well, except for the bankers' fees. If shareholders choose to sell the warrants, he will get paid for the dilution, or if the warrants expire worthless, no one exercises, there is no dilution. Again, what 'cost' is there, and whose cost? Isn't this a left pocket / right pocket situation (which Dee mentioned, and I thought it contradicts his own argument of high costs).

ya it's quite funny cos it's not a share placement (if it is a share placement, the shareholder should ask for as high a price for placement since the dilution will happen regardless)

on the one hand, the yield to maturity for the whole package for a shareholder is pretty nice (>13% if u can sell the rights and hold to maturity assuming no bankruptcy and ability to pay coupons)

on the other hand, if the company can only raise capital at an effective rate of >13% (if i remember correctly, Olam claims Temasek approached them with the deal - if they don;t need to capital badly couldn't they have gotten a better deal?), then the cost to the shareholder will be an inability to generate returns in excess of costs, resulting in a tanking of share price. so make 13% but lose >13% in share price?

but then this is really just a poker game in reality - at this stage establishing stability and confidence and preventing a run on the bank is more important to Olam than valuation and what not.

It is quite a difficult question to answer if we go into details. Michael Dee arrive at 13% by adding the YTM of the bond with the black scholes valuation of the warrants. This is deemed as the price that market is willing to pay to fund Olam. But this may be an overstatement since Temasek seems keen to take it all up, which he himself admits as an early Christmas sale of the century. If it is that toxic, probably it wouldn't be a present

HOWEVER from a company's perspective, their cost is the YTM of the bond and the POSSIBILITY of being diluted at around 1.50 strike. If the warrant expires worthless (which i said is a pyrrhic victory for shareholders) the cost is just the 8% YTM. Question therefore is what is the intrinsic value of the firm, since this is a value forum? Price to book? It is obvious that I'm not a believer of CAPM cost of equity model that relies on volatility/ beta and price action statistics.