Muddy Waters vs Olam + Temasek: An issue that warrants a look

Sunny Verghese - voiddecker.com

Sunny Verghese: “Who’s questioning my ability as a bean counter?”

As a writer, I relish the many ways I can pun the headline when commenting on an issue such as this. As a Singaporean, I’m not sure this is the time to get all nationalistic about it.

Here’s a summary if you haven’t been following the saga. It started on November 19 when California-based research firm Muddy Waters and its owner Carson Block raised serious questions at a London investment conference about the accounting practices of Singapore-listed commodities trader Olam. Likening it to Enron, Muddy Waters accuses Olam of accounting gaffes and running a high risk of failure, and is adamant that the company is going under like the American energy giant.

Muddy Waters itself is well known for such attacks, having successfully targeted Chinese companies in the past. By building huge short positions in Olam before making the allegations, its intention to profit is clear. As to be expected, Olam’s share prices started to fall in the following days and has already prompted several trading halts.

Last week, Muddy Waters released a full 133-page report detailing their allegations. Olam has since issued its rebuttal, though not answering every accusation. In typical Singaporean style, Olam — which counts Temasek Holdings as a major shareholder — also filed a defamation suit in a Singapore court against Muddy Waters. Since then, Muddy Waters has threatened to counter-sue and further challenged Olam by offering to foot the bill for a credit rating to be performed by Standard & Poor’s. Not surprisingly, Olam did not take the bait.

This ongoing dispute took a twist on Monday when Olam announced a US$1.2 billion rights issue of bonds with attached warrants. It’s a surprising U-turn because, just days ago, CEO Sunny Verghese had claimed that Olam is very comfortable with its balance sheet position and definitely will not require additional funding in the next five to six months.

Not many will be convinced by Verghese’s claim that this rights issue is simply “a big, bold decisive move to eliminate some of those lingering doubts created by all that mud that was thrown”. Well, companies don’t raise funds just to prove that they can. Analysts see this as a counter-offensive move to entice lenders to recall their stocks from short-sellers in order to participate in the issue, or risk a dilution in their holdings. The effect is to create a short squeeze that will jack up its share price. It was the same strategy used successfully by HSBC in 2009 when under attack from short-sellers. Sceptics, though, will wonder if Olam is now casting doubts on its own financial security upon closer scrutiny.

What raises eyebrows is not the rights issue itself, but that Temasek is going all out to back Olam not just in words but financially as well. I can understand that, as a major shareholder, it is important that Temasek stands by Olam. By direct extension to its owners, the Government of Singapore, Temasek may see a need to protect a Singapore company as well. After all, any fraudulent practices by a local blue chip, if uncovered, will harm Singapore as a financial centre by calling into question its regulatory environment and corporate governance laws. Temasek has taken to fully underwrite this rights issue, meaning it will buy up all unsold rights. Immediately, Muddy Waters has responded by calling this a government bailout.

Muddy Waters’ own agenda may be clear, but that does not automatically disprove their claims. Right or wrong, it has proven its ability to bring down companies in the past, as was the case with Sino-Forest. In the case of Olam, there are still questions to be answered. So one can only hope that Temasek knows what it is doing, else it risks throwing good money after bad in this rights issue should the allegations prove true. Moreover, it can’t be good in the longer term for the credibility of Singapore as a free functioning market if government-backed entities such as Temasek are always there to shore up and protect Singapore companies. Investors, especially foreign ones, will only grow sceptical while sheltered local companies may become complacent or shoddy in their practices. The former is already evident in the FT Alphaville post linked above that commented: “this is a reminder to all that there are special factors to take into account of when trading in Singapore”.

According to reports, this issue will be targeted at retail investors in Singapore who typically make up 60% of Olam’s bond investors. I hope our mom and pop investors do not depend solely on our Straits Times or Business Times for investment advice. Our local press has been showing a nationalistic tendency to be defensive and sympathetic towards Olam for the past weeks by carrying articles eager to paint short-sellers in a negative light and portray Olam and its CEO Sunny Verghese as victims of a targeted attack by hedge funds. For the less discerning, it’s easy to be swayed if one has to pick a side between a home-grown blue chip and evil hedge funds. DBS, as one of the main underwriters, will no doubt also help by dutifully promoting this to its investors.

Even more so than other investments, this must come with a big sign that screams Caveat Emptor. To start with, it’s best to stick with the likes of Financial Times, Bloomberg and Wall Street Journal for some balanced coverage, such as this.