Olam to price $300 million five-year convertibles to yield 0.5%-1%, up 30%-40%

By Rebecca Melvin

New York, June 4 - Olam International Ltd. plans to price $300 million of five-year convertibles with a coupon talked at 0.5% to 1% and an initial conversion premium of 30% to 40%, according to a market source.

There is a greenshoe of $100 million.

The bonds are non-callable for three years and provisionally callable thereafter subject to a 130% trigger. There is a put in year three.

The bonds, which also include dividend and takeover protection, are viewed as attractive on best terms, depending on stock skid, according to Barclays Capital Research.

"We value the bond at 100.7-104.8 (worst-best for investors) assuming no stock skid, and 97.5-101.1 assuming a 10% stock skid," Barclays said in a research report.

Barclays used Noble Group, another Singapore-based commodities company, as a peer for comparison purposes. It is rated Ba1 by Moody's Investors Service and BB+ by Standard & Poor's and has a market cap of S$7.9 billion, compared with S$ 5.1 billion for Olam, which is not rated.

Noble Group's $250 million convertible due 2014, which is putable in June 2011, is indicated with an implied volatility of 41%, using a price of 135.0 versus S$2.40 and a 320 basis point credit spread.

One hundred-day and 260-day realized volatilities for Olam stand at 78% and 62%, respectively, compared with 68% and 61% for Noble Group. On average over the past three years, Olam and Noble Group's 100-day volatilities were 46% and 48%.

This suggests that Olam could trade at a slightly higher implied volatility level than Noble Group, although this could be mitigated by skew: Olam's conversion price is 30% to 40% above the current share price, whereas Noble Group is approximately at the money. Also, the new Olam issue would convert into about one month of average volume in the shares based on the past year, whereas it's about three weeks for Noble Group's convertible.

"Lastly, we expect that both implied volatilities could slip slightly due to the new supply. In mitigation, we expect continued support for high equity volatility in the sector. Taken together, we use 40% for our Olam volatility assumption," Barclays said.

For the credit, Noble Group recently issued a $500 million 8.5% five-year straight bond, which is currently indicated around par. Noble Group five-year CDS is indicated at around 340 bps.

Barclays credit analysts cover Noble Group with a "negative" fundamental view. "We would view Olam's credit as slightly weaker than Noble Group's, and together with its smaller market cap, take 500 bps as our spread input," the research report stated.

For the dividends, the protection threshold schedule implies an average dividend yield of about 1.75%, so Barclays used this for its modeling.

Stock borrow is indicated in the market at 1.5%.

Given those parameters and assuming no stock price decline immediately following issue, Barclays values the deal at 100.7-104.8 (worst-best indicated terms for investors), with a 87.6-89.0 bond floor, 47% to 51% delta and 31% to 39% implied volatility.

However, if 5% stock skid is assumed, then Barclays' valuation would drop to 99.1-102.9 with implied volatility of 38% to 45%, and if Barclays assumes a 10% skid, then it would fall to 97.5-101.1 with implied volatility of 34% to 42%.

Proceeds are expected to be used to refinance existing debt, to fund acquisitions and for general corporate purposes.

Olan is a Singapore-based integrated supplier of agricultural products and food ingredients.

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