Singapore's Temasek Bails Out Another Loser

Although the Singapore government is coming to the rescue of the embattled commodities trader Olam Commodities by underwriting a US$750 million bond issue, if this were happening anywhere but in tightly controlled Singapore, the media would likely be up in arms.

They would be arguing that Temasek, the government’s investment arm, is throwing good public money after bad to save the faces of the Temasek managers who committed so publicly to the Singapore-based Olam in the first place, buying 16 percent of the commodities trader in 2009.

Olam, the world’s second biggest rice trader, needed rescue because of a brutal attack on its finances by Muddy Waters Research, the US firm run by Carson Black, which has made its name by shorting and then exposing companies with dubious accounting practices and other governance shortcomings.

Hitherto Muddy Waters has mainly focused on US-listed mainland China-based companies that had acquired backdoor listings in US markets. The attack on Olam, supposedly about the brightest young star in the Singapore corporate firmament, was of a different order altogether.

Muddy Waters alleged that Olam was desperately over-exposed and would collapse without massive cash injections. The share price subsequently collapsed even though Olam denied all the allegations and is suing Muddy Waters in Singapore. This may soothe the nerves of Singapore investors but Olam will have to bring a case in a court elsewhere for such suits to impress foreign investors and creditors.

The Temasek cash injection is clearly a so-far successful attempt to squeeze those who had been shorting Olam on the basis of the Muddy Waters claims. How far they have been squeezed depends on the price at which they went short. Before the Muddy Waters announcement that it was to make a report on Olam, the price was then around S$2. It then collapsed to a low of S$1.55 last week before recovering to S$1.70 in the wake of the Dec. 4 bond announcement before falling back again to S$1.55 by the close on Dec. 5.

But the fact that Olam now has to raise so much money so quickly is clearly an indication that Black’s allegations contained sufficient grains of truth and that the company really did need, now or soon, lots of cash just to survive. Otherwise it surely would have just ridden out the storm and let its subsequent results reveal that Muddy Waters was wrong.

The price Olam is having to pay is a high one – five year bonds with an 8 percent yield plus warrants for US$500 million worth of stock exercisable after three years at the Nov. 30 closing price. Companies in good shape do not make such offerings. Temasek’s full underwriting of the issue shows how desperate it is for Olam to survive.

That it may well do now, but the managers of Singapore’s savings have enough records of buying into fashionable stocks near the top and then having to help bail-outs on the way down. UBS was a classic example. GIC, the Government Investment Corporation, backed UBS big time when banking was the flavor of the day, losing massively. Temasek likewise lost heavily on Bank of America. Its initial backing of Olam was better timed. It paid just S$1.60 for most of its stake when commodities were down after their 2008 high and before their 2010 rise. Olam’s all-time peak was S$3.50 when commodity trading was the big game in town and it got back to over S$3.00 in 2010-2011 before the boom faded.

Temasek is now being forced to put more money behind Olam to the extent that it may well feel obliged to provide more should this cash infusion prove insufficient. It is now so deep into Olam that the least likely event – a change of government in Singapore – would likely now let it go to the wall despite the fact that Black now says the bond issue will only delay its demise.

It remains to be seen how much of the bond issue ends up in Temasek’s hands. If it were eventually to exercise all its warrants its stake would rise to 29 percent. But that is three years away and doubtless many hurdles lie ahead for a company with hefty bond interest payments to meet and a real financial conditions that outsiders can merely guess at as the war of words between Olam and Black continues.

But instead of cutting its losses now or staying on one side as Olam and Muddy Waters have their war of words, Temasek has chosen to use its financial muscle in a way which might be construed as of more interest to the management of Olam and the non-Temasek pre-November investors than to the citizens of Singapore.