Olam launches convertible bond exchange

Olam International yesterday announced an offer to investors in its existing convertible bond to exchange their holdings for a newly issued CB. The company, a Singapore-listed supply chain manager of agricultural products and food ingredients, has been actively reducing the burden of the $300 million CB that it issued in July last year following a collapse both of the price of the bond and of Olam's share price.

In December Olam repurchased $117.6 million of the original CB through a tender offer, paying investors 65 cents on the dollar. And since then it has bought a further $6 million worth of bonds through open market purchases, leaving $176.4 million outstanding. The buy-backs have not only reduced Olam's leverage, but also allowed the firm to book a S$55.9 million ($36.8 million) non-recurring gain for the six months to December 31, 2008.

Under the terms of the exchange offer, the bondholders will be able to get a principal amount of new bonds equal to 78% of the original bond. The new bonds come with a coupon of 1.2821%, compared to 1% of the original bond. The maturity will remain unchanged at July 2013, and the new bonds can be put back to the company on July 2, 2011, at a price of 141.025.

The conversion price on the new bonds will be much lower too: S$1.65 compared to the original S$3.84. With Olam's shares recently trading at around S$1.25 to S$1.40, this means that the new CB is much more likely to convert. The conversion price on the new bonds represent a premium of 20% over the February 13 closing price of S$1.38. The original bonds were issued with a conversion premium of 30%.

Rather than a call, the new bonds have a mandatory conversion feature which kicks in on July 3, 2010, and which will enable the issuer to force conversion subject to a hurdle of 140% in the 12 months to July 3, 2011, and at a hurdle of 130% after that.

Olam is going ahead with the exchange offer rather than continuing with a straight buy-back because the current structure does not require any further cash outlay. Therefore the company is able to benefit from the reduction of debt without spending any more money. With the increased chance of an equity conversion, the company is less likely to have to repay the money in the future. Furthermore, it will be able to book another one-off gain to its profit and loss account.

From an investor point of view, the original CB was a bad buy. It was issued while the company¹s share price was doing well, just before the commodity bubble burst. In the period between the issuance and the buy-back tender in December, the share value plummeted by 70%, severely reducing the chances of conversion.

At the time of the tender, the CB was trading at around 50 to 55 cents on the dollar. It was thought that the tender would allow the bonds to rally in the secondary market since it would get rid of many of the investors who had given up on the bond and were keen to offload it. Indeed, secondary market trading has improved, with the CB now trading at between 70 to 75 cents on the dollar, but this could also be due to the fact that Olam¹s share price has risen by 36% since the buy-back.

Last week Olam released its results for the first half of the 2009 financial year. Its after tax profit increased by 32.9% to S$62.4 million, excluding the one-off gain from the CB buy-backs. In the same period, sales revenue was up 16.1% and sales volumes increased by 20.2%.

The exchange offer, which is being arranged by J.P. Morgan, starts today at 8.00am (Singapore time) and expire at 8.00am tomorrow. An announcement will be made by February 24 regarding the number of new bonds to be issued.