Olam's capital raise U-turn - a block on Block? "We are very comfortable with our balance sheet position, in terms of our equity position as well as our debt position," Sunny Verghese told Reuters in an interview on Thursday... Asked when Olam was likely to tap the markets at the earliest, Verghese said: "Definitely not in the next five to six months." That was the managing director and CEO of agricultural trading group Olam, speaking to Reuters last week. Verghese was desperately trying to counter the full frontal attack from Carson Block's Muddy Waters, who a week earlier had published a 133-page research note suggesting Olam was probably going to go bust. Since the Reuters interview we might assume Olam has become less comfortable with its balance sheet position because on Monday the company announced a $750m rights issue (our emphasis): The directors (the "Directors") of Olam International Limited (the "Company") wish to announce that the Company proposes to undertake a renounceable underwritten rights issue (the "Rights Issue") of US$750 million in principal amount of 6.75 per cent bonds due 2018 (the "Bonds"), in the denomination of US$1.00 for each Bond, with 387,365,079 1 free detachable warrants (the "Warrants"), each Warrant carrying the right to subscribe for one new ordinary share in the capital of the Company (the "New Share") at an exercise price of US$1.291 for each New Share (the "Exercise Price"), on the basis (the "Rights Issue Basis") of 313 Bonds of principal amount of US$1.00 each with 162 Warrants for every 1,000 existing ordinary shares in the capital of the Company (the "Shares") held by the Entitled Shareholders (as defined in paragraph 2.2 of this Announcement) ... The issue price of the Bonds will be 95 per cent. of the principal amount and the gross proceeds from the issue of the Bonds is US$712.5 million. So, where's the money going? The Company intends to utilise the net proceeds for terming out short term debt (approximately 50%) and general corporate purposes including meeting working capital requirements (approximately 50%). And why is it doing this? To show it can, it says: That shareholder is Temasek, the Singaporean SWF, which owns 16 per cent of Olam and has agreed to underwrite the entire offer. Olam's existing shares were suspended on Monday at SGD$1.575, so we'll have to see what the reaction is when trading resumes on Tuesday. But the betting has to be that shares in Olam may well go up. That would be quite an achievement for an out-of-left-field rights issue, but then the structure of this cash call is unusual - an offer of bonds that come with warrants over new stock, exercisable at the suspension price. So Tamasek, and who ever else supports the offer, are essentially getting free options to buy 387m new shares at current market prices. That's 16.2 per cent of the current shares outstanding. Maybe the idea here is that Block and other hedgies who followed him into the trade, close out their shorts by subscribing to the bond issue. Maybe. Either way, this is a reminder to all that there are special factors to take into account of when trading in Singapore... Related links: Muddy Waters weighs on commodities traders - FT Muddy Waters (finally) publishes report on Olam - Alphaville