Olam turns to courts in battle with Muddy Waters
Singapore commodities trader Olam International took its battle with short-seller Muddy Waters to a Singapore court on Wednesday as it fought off criticisms of its accounting practices and debt levels that have battered its share and bond prices.
Olam, 16 per cent-owned by Singapore state investor Temasek, has filed suit against Muddy Waters, LLC and its founder Carson Block in the High Court of Singapore, alleging libel, slander or malicious falsehoods for statements Block made at a London conference on Monday, a company spokeswoman said. She said Olam was seeking damages but gave no details.
No comment was immediately available from Muddy Waters.
Block’s comments, which had singled out Olam’s accounting practices and questioned its prospects, triggered a fall in Olam’s Singapore-listed shares on Tuesday of 7.5 per cent.
Muddy Waters kept up its attack with a letter dated November 20 and posted to its website that criticised Olam’s debt and cash burn, but this time investors took the salvo in stride.
Traders and analysts noted that the letter was not as scathing as previous, formal research reports issued by the short-seller.
“The detailed report is still not out yet,” said a Singapore trader about Olam’s stock rebound. The trader was not authorised to speak publicly. It is unclear whether Muddy Waters will publish a formal report on Olam or not.
Olam’s shares bounced 5.3 per cent on Wednesday and were the biggest gainers in the benchmark Straits Times Index, which ended flat. Although the stock clawed back some of the previous day’s loss, it is still down about 20 per cent so far this year, while the index is up 12 per cent.
Analysts said the saga may be a long, drawn-out affair.
“It does show that Olam is putting up a good fight, but the outcome of this case remains to be seen,” said Wen Ching Lee, analyst at CIMB Research in Singapore.
“Investors could be hesitant to buy the shares until this entire saga has blown over. Right now there is a lot of uncertainty as to whether Muddy Waters will make further allegations,” she said.
Muddy Waters, which makes money by betting against companies, has issued devastating reports in the last few years, mainly aimed at China-based companies. Some of the reports crushed shares of the targets, although others were able to recover.
Olam on Tuesday gave a strong defence of its business, calling Block’s attack “baseless and unsubstantiated” and assuring that it could fund operations for 18 months even if it were shut out of the debt markets. It also said it would consider share buybacks after the drop in its stock price.
Muddy Waters followed by stepping up its offensive.
“Should Olam come to collapse (as we believe it will), its use of much-needed cash to buy back shares at this time should give rise to questions about whether fiduciary responsibilities have been breached,” said the relatively brief letter, addressed to Olam’s Chief Executive and its board.
This was not the first time accounting has been questioned at Olam.
In February 2011, the company denied there were inaccuracies in its accounts after a CLSA analyst raised concerns about internal controls, citing multiple and sometimes significant differences between Olam’s audited and unaudited statements.
Muddy Waters cited the 2011 CLSA note in its letter.
“Olam has since increased its a) debt load by approximately S$900 million, b) cumulative investment cash burn by approximately S$2 billion (US$1.63 billion), and c) cumulative operating cash burn by approximately S$500 million,” the letter says.
Olam has US$4.125 billion of outstanding debt, including bonds and loans, according to Thomson Reuters CreditViews. The bulk of its bonds are held by retail investors who can be quick to unload paper, making for volatile prices.
Olam’s bonds were trading steady on Wednesday, but caution was still in the air as prices are off the levels prevailing before the Muddy Waters allegations.
The bonds due in 2017 were at 93-94.5 cents on the dollar and 2020s were at 94.5-96, both recapturing more than half their losses at the previous day’s lows. Before the allegations surfaced, the bonds were at 98 and 101, respectively.
Olam has grown from its origins in Nigeria into a diverse agricultural commodities trading company with interests ranging from cocoa and coffee to nuts and sugar.
Chief Executive Sunny Verghese has led an expansion that has seen it take on larger commodity players such as Noble Group and Wilmar International.
Muddy Waters may not be the only firm betting against Olam, which is the most borrowed stock among Singapore’s top 30 companies, suggesting heavy demand from short sellers.
Nearly 80 per cent of Olam’s shares that can be borrowed were out on loan, compared with an average of about 6 per cent for the index constituents, according to Markit Securities Finance.