Olam exercises option to upsize CB; sells it all to Temasek

Singapore-listed Olam International on Thursday last week announced that it had exercised the $100 million upsize option on the $400 million seven-year convertible bond that it issued a month ago, increasing the total deal size to $500 million. The original CB attracted a lot of attention as it had to be reoffered below par with revised terms after investors deemed the original terms too aggressive.

The deal was much better received at the new terms and the bonds have been edging higher in the secondary market from the reoffer price of 98. Before the option was exercised on Thursday they were quoted at 105.5-106. Investors are also generally positive about Olam's equity story after the integrated supply chain manager of agricultural products in August outlined a revised strategy for the coming six years.

That said, the entire upsize option was bought by Temasek Holdings through an indirect wholly owned subsidiary named Breedens Investments, which means the sale of an additional $100 million doesn't really say anything about the demand for Olam in the wider market.

Temasek's support should, however, help boost confidence in the company among other investors. The Singapore government-owned investment firm is already the second-largest shareholder in Olam after it invested an initial $305 million for a 13.8% stake in early June and has one seat on the board. The day after that investment was revealed, Olam's share price jumped 11.3%.

In a release to announce the exercise of the upsize option, Olam's group managing director and CEO Sunny Verghese noted that the proceeds from the upsized CB will support the company's recently announced six-year corporate strategy to enhance its presence across the upstream and midstream elements of the agribusiness value chain, and will further enhance Olam's ability to finance its expansion plans, including potential acquisitions in the future.

"Following the upsize, Olam is well positioned financially to build on its leading competitive position in an attractive industry with strong growth prospects," he said.

The bonds pay a coupon of 6% and the conversion premium was set at 25% over the September 1 volume-weighted average price of S$2.4682, which gives a conversion price of S$3.085. The share price fell 7.3% the day after the original CB was issued but has since been edging gradually higher and on Thursday it closed at S$2.47. After the announcement of the size increase, the share price fell 2.4% on Friday to S$2.41, as investors digested the fact that the potential dilution will increase. At the current share price, the CB is offering an effective premium of 28%.

The seven-year bonds have no put -- although there is an issuer call after five-years, subject to a 130% hurdle -- which means the funding will remain in place for the entire six-year period that is covered by the company's recently outlined strategy. Aside from the expansion in upstream and mid-stream businesses to achieve a more integrated value chain, the strategy includes a target to double Olam's intrinsic shareholder value in each of the next two three-year cycles. The company also plans to build on latent assets such as its packaged food business and its commodity financial services group, and to downsize or exit unattractive businesses and activities.

Olam aims to improve its gross profit margin to 4% by 2015 from 2.2% in fiscal 2009, which ended in June this year.

Under the original terms, the CB was offered with a coupon range of 4.5% to 5.4% and a conversion premium between 28% and 35%. Investors viewed both these as too aggressive, especially when considering that Olam's share price has already risen 180% since early December last year. Some investors also took issue with the seven-year maturity, arguing that it was too long for an unsecured deal from a company with no credit rating and no straight bonds in the market to provide visibility on the credit, but this remained in place after the terms were revised.

J.P. Morgan and Standard Chartered were joint bookrunners for the original CB (albeit with the economics split 75-25 in favour of J.P. Morgan) and also oversaw the exercise of the upsize option.