OLAM INTERNATIONAL LTD (Olam): Olam recently issued a unrated SGD 5.5% Subordinated Perpetual bonds callable in 2022. If the bonds are not called, the bond will be reset at S

OLAM INTERNATIONAL LTD (Olam):  Olam recently issued a unrated SGD 5.5% Subordinated Perpetual bonds callable in 2022. If the bonds are not called, the bond will be reset at SGD 5-year Swap + initial spread and step up margin of 200bps. Any deferred distributions are cumulative and compounding. OLAM has two major shareholders i.e. 52.2% by Singapore state-owned holding company Temasek and 20.3% owned by Mitsubishi Corporation.  Although the company has strong shareholder profile, the absence of change of control protection in the bonds issued could pose risk in the event of change in major shareholding, which in turn lead to sell down in the security.

We view that Olam’s current credit metrics as weak given its high gearing and continuous negative cash flows as of FY2016. Olam senior unsecured unrated bond are modelled at at IG8/- (BBB+ equivalent) by Bloomberg default risk rating band, after adjusting for its subordinated ranking two notches down, we believe the Olam SGD unrated 5.5% Perpetual NC 2022 could  treated as BBB- with negative outlook. This is due to its poor credit profile and lack of track record by Temasek in supporting subordinated instruments in the event of underperformance or default.  

Comparing to Olam’s existing subordinated bonds, we view the Olam SGD 5.5% Perpetual NC2022 (z+360bps) as trading at stretched valuation as its senior-to-perp multiple of 1.24x is lower than Olam’s unrated USD 5.35% Perpetual NC2021 (z+356bps) at 1.56x though it is 1 year shorter. We believe the tighter valuation could be due to the scarcity of the higher yield bond supply within the SGD space.