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Muddy Waters Calls Temasek-backed Olam Fund-Raising a 'Bailout'

Sri Jegarajah
Monday, 3 Dec 2012 | 10:38 PM ET
Olam's CEO Sunny Verghese
Photographer | Collection | Getty Images
Olam's CEO Sunny Verghese

Short-seller Carson Block, founder of Muddy Waters Research, continued his attack against Singapore-listed Olam International on Tuesday, characterizing the company's $1.25 billion fund-raising plan as a "sovereign bailout" a week after the commodities trader said it had enough liquidity.

Block, who has alleged accounting irregularities, aggressive spending and high debt levels at the coffee to cashew nuts supply-chain manager, also gave Olam between six to eight months to survive depending on the rate of "cash burn."

Still, investors seem to be giving Olam the benefit of the doubt. The company's shares rose as much as 8.6 percent after a trading halt was lifted on Tuesday responding positively to the capital raising plan announced on Monday.

The rights issue has the support of Temasek, which owns 16 percent of the company.

Muddy Waters' Block, however, believed the rights issue was an admission of weakness.

"We view this debt offering as a clear victory," Block told CNBC Asia's "Squawk Box". "Less than a week ago we warned Olam might collapse. We now effectively have a stop-gap sovereign bailout of the company…$750 is just small chunk of what we think they need to raise just to last a year."

Olam's rights issue will comprise of $750 million in bonds with a five-year maturity and a cash coupon rate of 6.75 per cent, and 387.4 million free detachable warrants worth up to US$500 million. The bonds will be priced at 95 percent of the principal amount.

The proceeds of the rights issue, which will be underwritten by Credit Suisse, DBS, HSBC and JP Morgan, will be used to repay debts and to fund working capital until early 2014.

Block confirmed his firm is "absolutely" shorting Olam stock, or making bets that the security will fall. He declined to disclose how large this position was.

Olam's Debt Offering a Victory for Muddy Waters: Block
Carson Block, Founder of Muddy Waters Research says Olam's rights issue is a clear victory for the research firm. He characterized the company's $1.25 billion fund-raising plan as a "sovereign bailout".

Olam's characterization of its debt levels was "somewhat disingenuous," Block argues. Key metrics including debt to EBITDA, a measure of a company's ability to pay off its incurred debt, stands at "9.3 times…which is very, very high."

Criticisms about Olam were first voiced by Block at an investor conference in London last month and led to a sharp fall in Olam shares. Olam has denied the allegations, saying they are "without basis" and started legal proceedings against Muddy Waters in Singapore.

In an interview with CNBC last week, Olam CEO Sunny Verghese said the company's banks continue to extend credit to the firm.

Not all investors share Block's concerns.

"While no business is without risks, we remain comfortable with Olam's credit position and longer term prospects, and are pleased to have another opportunity to invest in the company, alongside other shareholders," said David Heng, Senior Managing Director, Investments at key stakeholder Temasek.

Adding a caveat that he was speculating "a little bit," Block said it was Olam's lenders who proposed the fund-raising plan to Temasek, Olam's second-largest shareholder, because the banks were "uncomfortable" with the company's borrowing levels and escalating interest payments.

The rights issue was therefore "not a vote of confidence," he said. "Temasek had to choose between bad to worse."

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