The Muddy Waters vs Olam battle has produced couple of twists and turns, who is right and who is wrong still debatable. Whatever the outcome of the saga, one fact remains that is true is Olam is presently having a high debt level and to any retail investors, that should be treated seriously. The latest move by Olam to do a right issue with bond-cum-warrants to raise fund raise more questions than answers from a retail investor perspective.
Firstly, the corporate action of right issue will have to force the short-sellers to close all the short positions and in a way providing some short-term support for the downside of its share price. A way to "force" Muddy Waters to close the short positions ?
Secondly, as reported by an analysts from one of the local bourses, as of September 2012, Olam had cash of $1380.20 million and borrowings of $8367.0 million. As according to Olam CEO comment on doing the current right issue "The offer will be aimed mainly at repaying borrowings", this no doubt further reaffirm of Olam high debt level and low of cash level. Investing in share is like investing in a business, do you feel comfortable in a business in which you have high debt level and low cash flow ?
Thirdly, Temasek Holdings as a substantial shareholders in Olam has affirmed its support to Olam by subscribing for 100% of the right issue. The commitment from Temasek Holdings might give a confidence boost but how can a retail investor be compared to a fund ? Temasek Holdings investment in BOA-ML since the 2008 financial crisis has resulted in a realized loss and its cornerstone investment in HPH Trust has not enjoy a single day of capital gain since it was listed in 2011 till now. Temasek Holdings investment is not always 100% correct as you can see.
Fourth, the package in the right issue, for every 1000 shares, shareholders will be offered 313 bond of yield 6.75% with a 5 year maturity and 162 warrants with strike price of US$1.291 with 5 years maturity and can only exercise after 3rd year. Olam existing bond listing prices have been hammered down since the Muddy Waters claims and yield has risen to more than the 6.75%. Should retail investors feel attracted by the new 6.75%, why not go for the existing which has much higher yield since all are issued by Olam. Those odd number of offering, warrants and bonds can result in retail investors getting odd lot and transacting in the SGX unit share market for these odd lots can be a painful. The liquidity is most of the time not there resulting in a spread that seldom in favor to retail investors. The strike price of the warrants is US$1.291. As of today, Fx rate for USD:SGD is 1:1.22 and who can assure after the 3rd year when one is allow to exercise, the Fx rate of USD:SGD is still in favor for investors ?
Fifth, as a retail investor, you have limited capital to invest. Given a period of next 5 years, who can assure global economy is still sound and not getting into a recession. Should global economy getting in a recession in the next 5 years, what is the chances of Olam will be tapping shareholders to raise fund again to pay for debts ? Anything can happen during global economy crisis, we have seen Cosco and SembMar contracts being canceled due to customers getting into credit difficult position to honor the deal. Anything could happen to Olam business in bad times as there is no absolute that they will be fine. Even the 3 local banks of DBS, OCBC and UOB have to do cash call during the 2008 financial crisis to shore up their cash flow and with Olam having high debt levels and low in cash flow, what is the possibility that they do not need to do fund raising again ? Should a fund rising occur, retail investors will again mostly in the disadvantage. If a private share placement is done, retail investors will face with share dilution as you cannot be involved in the share placement. If it is a normal right issue and if you choose to give up the offering, you will face with share dilution (and dividend dilution) and if you take up the offering means you need to inject more capital into the investment. Retail investors with limited investment capital and if need to keep injecting capital to the same stock will result in violating the golden rule of investing "Never put all your eggs in the same basket".
Sixth, if the latest move by Olam is a strategy to defense against Muddy Waters, why should retail investors money being used for the company to combat the battle with Muddy Waters ? A strategy that can easily see through is never a good strategy.
As a retail investor, investing in share is like investing in a business, there are so many listed companies out there and why should you choose to invest in a company with high debt level and not choosing some other that can afford you peaceful night of sleep over your investment and not worrying about can the company survive with high debt level ? Before you hitting the buy button, do think carefully over those questions being raised above.
