As bond deals go, it wasn’t the biggest: a $300 million five-year print with a modest $450 million book. But Olam’s April issue told us a lot about the company’s rehabilitation and the long-awaited comeback of debt capital markets issuance from Asia.
Seven years ago Olam was a rising star, an impeccably-connected soft commodities group with a model of dominating the supply chain from farm gate to consumer. It was the world’s largest supplier of cashew nuts and a big player in cocoa, cotton, teak and rice; it was one of the most active issuers and borrowers in Asia, flitting between the loan, equity, bond and convertible markets; and it was about to embark on an ambitious strategic plan to increase its intrinsic value four times over in the next six years.
Then in November 2012, short-selling research group Muddy Waters said Olam was at high risk of failure, alleging shoddy accounting and mishandled acquisitions. Muddy Waters had already caused the collapse of other companies on its research list, notably the Chinese timber firm Sino-Forest, and for a while it looked like Olam might go the same way. Instead, the company regrouped, revamped and returned. April’s issue was not the first since the Muddy Waters affair but it was the first to showcase the company with a new strategy properly embedded, and a galvanised shareholder structure too.
A Shekhar, Olam
Along the way, Temasek Holdings, the state investment arm and a long-time backer of Olam, increased its stake to 50.1%, followed by a strategic investment by Mitsubishi Corp for 20% of the company in August 2015.
“The new mix of shareholders was a huge change,” Shekhar says. “One part of our learning from the 2012/13 episode was that our strategy was long-term and our shareholder register was very short-term. If we wanted to stay on strategy – with plantations which start yielding in year three and fully mature in year seven – we had to get the right mix, with investors with the patience and wherewithal to stay the course.”
Sign of progress
The willingness of the market to digest such a deal marked a sign of progress for other issuers. At the same time Olam was selling, fellow Singaporean PSA International was in the market for 10-year funding, while Korean oil company KNOC launched a split five- and 10-year 144a/RegS offer. Two weeks later, China Aoyuan Property Group launched a $250 million high-yield deal that was seven times covered, breathing life into a Chinese high-yield market that is increasingly being undercut by domestic issues there.
It’s early days, though. “The markets, although they are reopening, remain cautious,” says Clifford Lee, head of fixed income at DBS Bank, a lead manager alongside HSBC and Credit Suisse on the Olam deal. He says the Olam book is worth studying for what it says about market tone. “The oversubscription ratio [50%] is reflective of the current market, where orders have come mainly from real-money investors with a medium- to long-term hold perspective,” he says. “There was less inflation of orders and fewer orders from more trading-oriented accounts, as the markets are still cautious.”
The pipeline is starting to look interesting and agreeably diverse. Two China-based multinationals, Huawei ($2 billion) and JD.com ($1.5 billion), are both preparing international issues.“The pipeline is improving, but non-Japan Asia issuance is still only 66% of last year’s levels, so we still have a way to go to get back to recent historical activity,” says Derek Armstrong, head of debt capital markets, Asia Pacific, at Credit Suisse.
Perhaps the most interesting area to watch will be Chinese high yield, which until recently could be expected to account for about two thirds of all regional high-yield issuance. “Since last year, the onshore bond market in China has opened up to Chinese borrowers to access cheaper funding for refinancing and even early redemption,” says Lee. That, in turn, has reduced any redemption pressure that might have pushed Chinese borrowers back into the international markets: for now, they can pick and choose, and the home market is looking a lot more attractive than the international.
That said, this year a number of domestic issuers have defaulted on onshore debt, triggering more than 100 cancelled deals in March and April alone, according to Shanghai Clearing House, so perhaps the China Aoyuan deal signals the pendulum moving offshore again.
As for Olam, work on optimizing the mix of balance sheet and maturity profile continues. Euromoney asks if anything positive came from the Muddy Waters scrutiny? “We didn’t like it at the time, because a lot of what was said was wrong,” Shekhar says. “But it generated a real sense of focus and urgency in the company.“