Olam International Limited will be spinning off its OFI Business on the London Stock Exchange. A consent solicitation exercise has been launched in view of the spin-off.
We think that bondholders may vote in favour for the OLAMSP 6.000% 25Oct2022 Corp (SGD), OLAMSP 4.375% 09Jan2023 Corp (USD), OLAMSP 4.000% 24Feb2026 Corp (SGD) resolutions.
However, we do not recommend noteholders to exchange their OLAMSP 5.500% Perpetual Corp (SGD) for the OLAMSP 5.375% Perpetual Corp (SGD).
In addition, perpetual noteholders, including those of the OLAMSP 5.375% Perpetual Corp (SGD) should vote against the extraordinary resolution to change its principal debtor to Olam Group Limited.
Olam International Limited (“Olam”) is asking bondholders to approve the change of some of the terms and conditions of its securities (“CSE”). At the same time, the issuer has proposed to exchange the OLAMSP 5.500% Perpetual Corp (SGD) to form a single series with the OLAMSP 5.375% Perpetual Corp (SGD) (“Exchange Offer”).
The CSE and Exchange Offer are connected with the proposed transactions announced in December 2021. Olam is in the midst of listing its OFI (“Olam Food Ingredients”) Business on the London Stock Exchange, and the Olam group will have a different corporate structure after the initial public offering of the OFI Business (Figure 1).
To reach this final corporate structure, a proposed restructuring, proposed dividend in specie, proposed disposal, proposed dilution and proposed demerger will be implemented (“proposed transactions”).
Figure 1: Intended corporate structure after the completion of the proposed transactions
As seen in Figure 1, upon completion, the OFI Business will remain under Olam International Limited (“existing bond issuer”), while the OGA (“Olam Global Agri”) Business and other subsidiaries will be under a newly formed entity – Olam Group Limited (“Olam Group”). Olam will be delisted from the SGX and an application for a new listing for the Olam Group will be made.
As a result, two legal business groups will be established and they will be independent of each other.
What are the affected securities under the CSE?
Table 1: Details of the consent solicitation exercise
|
|
Proposal |
Early consent fee |
Early consent fee deadline |
Expiration time consent fee |
Expiration Time |
Meeting to decide voting outcome |
|
OLAMSP 6.000% 25Oct2022 Corp (SGD) |
Waive any potential event of default or event of default that may arise as a result of the proposed transactions. |
0.25% |
31 January 2022, 5pm |
0.15% |
7 February 2022, 5pm |
9 February 2022 |
|
OLAMSP 4.375% 09Jan2023 Corp (USD) |
Waive any potential event of default or event of default that may arise as a result of the proposed transactions (“Waiver Extraordinary Resolution”), and, Substitute Olam International Limited with Olam Group Limited as the principal debtor and issuer, while at the same time, release Olam International Limited from all obligations and liabilities under the notes allow Olam Group to redeem the bond at any time at the Make-Whole Amount (“Substitution Extraordinary Resolution”). |
Waiver Extraordinary Resolution only: 0.30%; Waiver and Substitution Extraordinary Resolution: 0.50% |
31 January 2022, 5pm |
Waiver Extraordinary Resolution only: 0.15%; Waiver and Substitution Extraordinary Resolution: 0.25% |
7 February 2022, 5pm |
9 February 2022 |
|
OLAMSP 4.000% 24Feb2026 Corp (SGD) |
Waive any potential event of default or event of default that may arise as a result of the proposed transactions. |
0.50% |
31 January 2022, 5pm |
0.25% |
7 February 2022, 5pm |
9 February 2022 |
|
OLAMSP 5.500% Perpetual Corp (SGD) |
Substitute Olam International Limited with Olam Group Limited as the principal debtor and issuer, and release Olam International Limited from all obligations and liabilities under the notes |
0.35% |
31 January 2022, 5pm |
0.20% |
7 February 2022, 5pm |
9 February 2022 |
|
OLAMSP 5.375% Perpetual Corp (SGD) |
Substitute Olam International Limited with Olam Group Limited as the principal debtor and issuer, and release Olam International Limited from all obligations and liabilities under the notes |
1.50% |
31 January 2022, 5pm |
0.50% |
7 February 2022, 5pm |
9 February 2022 |
| Source: Company | ||||||
Table 2: Exchange Offer
|
|
Proposal |
Exchange consideration |
|
OLAMSP 5.500% Perpetual Corp (SGD) |
Exchange existing holdings of the OLAMSP 5.500% Perpetual Corp (SGD) to form a single series with the OLAMSP 5.375% Perpetual Corp (SGD) |
SGD 4,625 (being 1.85% of the principal) for every SGD 250,000 of notes |
| Source: Company | ||
Olam is asking bondholders to approve the extraordinary resolutions in Table 1. As mentioned, the CSE is part of the group’s proposed transactions and reorganization exercise. Concurrently, noteholders of the OLAMSP 5.500% Perpetual Corp (SGD) are also being asked to exchange their holdings for the OLAMSP 5.375% Perpetual Corp (SGD). This effectively extends the redemption date for the near term notes as the Olam 5.5% notes are callable in July 2022 whereas the Olam 5.375% notes are callable in July 2026.
What is the financial impact of the proposed transactions?
For the purpose of illustrating the financial effects of the proposed transactions, Olam has guided on the impact on Olam Group Limited, which is the remaining entity after the OFI demerger (see Figure 1). The financial effects, which are based on FY2020 results are summarized in Table 3.
Bondholders are encouraged to read the actual announcement from the company here for the assumptions and further details.
Table 3: Pro forma FY2020 financial variables for Olam Group Limited
|
|
Upon the completion of the proposed transactions |
|
Adjusted net profit attributable to shareholders |
~ - SGD 205.4m |
|
Adjusted operational net profit attributable to shareholders |
~ SGD 186.6m |
|
Net tangible assets |
~ SGD 2106.8m |
|
Net gearing (Net borrowings over total equity) |
1.61x |
| Source: Company, iFAST compilations | |
Table 4: FY2020 financial variables for Olam International Limited
|
|
As at 31 December 2021 |
|
Profit after tax and minority interest |
SGD 245.7m |
|
Operational profit after tax and minority interest |
SGD 677.8m |
|
Shareholder’s equity |
SGD 5962.5m |
|
Net debt to equity |
1.72x |
| Source: Company, iFAST compilations | |
Our recommendations
The demerger of the OFI Business and final corporate structure of the group is credit negative for bondholders. Referring to Table 3, operational profit would decrease and net gearing for the Olam Group Limited is still at an elevated level. However, we believe that existing shareholders, which include Temasek Holdings will still retain a majority interest in the companies even after the demerger.
With that in mind, here are our thoughts on what bondholders should do.
Table 5: Consent Solicitation Exercise
|
|
Proposals |
Our recommendation |
|
OLAMSP 6.000% 25Oct2022 Corp (SGD) |
Waive any potential event of default or event of default that may arise as a result of the proposed transactions. |
Vote in favour of the extraordinary resolution by the early consent fee deadline |
|
OLAMSP 4.375% 09Jan2023 Corp (USD) |
Waive any potential event of default or event of default that may arise as a result of the proposed transactions (“Waiver Extraordinary Resolution”), and, Substitute Olam International Limited with Olam Group Limited as the principal debtor and issuer, while at the same time, release Olam International Limited from all obligations and liabilities under the notes allow Olam Group to redeem the bond at any time at the Make-Whole Amount (“Substitution Extraordinary Resolution”). |
Vote in favour of the Waiver Extraordinary Resolution (only) by the early consent fee deadline. We do not view the Waiver and Substitution Extraordinary Resolution as a favourable outcome for bondholders because we prefer Olam International Limited as the principal debtor and issuer (see reason below on the Olam Group Limited and why perpetual note holders should vote against their resolution). |
|
OLAMSP 4.000% 24Feb2026 Corp (SGD) |
Waive any potential event of default or event of default that may arise as a result of the proposed transactions. |
Vote in favour of the extraordinary resolution by the early consent fee deadline |
|
OLAMSP 5.500% Perpetual Corp (SGD) |
Substitute Olam International Limited with Olam Group Limited as the principal debtor and issuer, and release Olam International Limited from all obligations and liabilities under the notes |
Vote against the Extraordinary Resolution. We think that noteholders would be better served if Olam International Limited remains as the principal debtor. The OFI Business will be under Olam International Limited and OFI accounted for 72.1% of Olam’s EBIT in FY2020. OFI’s EBIT / Invested Capital is still decent at 8.4%. Furthermore, Olam intends to spin-off OGA in future. OGA accounted for 88.6% of Olam’s sales volume in FY2020 (majority of total revenue), with an EBIT/ Invested Capital of 13.7%. After the OFI demerger, Olam also intends to spin-off its OGA unit in future. This may result in a marked deterioration in the Olam Group’s debt servicing ability. Therefore, we feel that Olam International Limited should remain at the principal debtor for the 5.375% perpetual notes. The 1.5% early consent fee may seem like an attractive offer but we think that voting against the resolution is the better option. |
|
OLAMSP 5.375% Perpetual Corp (SGD) |
Substitute Olam International Limited with Olam Group Limited as the principal debtor and issuer, and release Olam International Limited from all obligations and liabilities under the notes |
|
| Source: Company | ||
Regarding our final comments regarding the Exchange Offer, we think that the 1.85% exchange consideration does not sufficiently compensate Olam 5.5% noteholders to effectively extend their redemption call date to July 2026. Moreover, there is a possibility that the principal debtor for the OLAMSP 5.375% Perpetual Corp (SGD) will be changed to Olam Group Limited, which has a weaker credit profile than Olam International Limited. In our view, Olam will still redeem any outstanding amounts of the OLAMSP 5.500% Perpetual Corp (SGD) in July this year.
As of June 2021, Olam still had an adequate liquidity profile with SGD 18.6b of available liquidity. The amount of bank lines and cash is sufficient to cover its SGD 6.7b of short-term borrowings. Overall, the combined value of total liquidity (i.e. SGD 18.6b) is more than enough to cover its total borrowings (SGD 15.0b) and SGD 1.5b of perpetual notes.
Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a position in OLAMSP 5.375% Perpetual Corp (SGD) and OLAMSP 6.000% 25Oct2022 Corp (SGD). The analyst who produced this report hold a NIL position in the abovementioned securities.
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