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Olam International: End of the Road for the 7% Perpetuals?
Bonds

Olam International: End of the Road for the 7% Perpetuals?

Olam is seeking to repurchase the majority of its 7% SGD perpetuals in March 2017; the company has also signalled its intention to call the remainder of the notes in September 2017

What's happening?

In an exchange filing this morning, Olam International has announced its intention to repurchase up to S$235.8m out of the S$275m outstanding amount of the OLAMSP 7.000% Perpetual Corp (SGD)s at par together with accrued interest, in March 2017. The company has also signalled that it intends to call the remainder of the notes (which have not been previously purchased and cancelled) on its next call date in 1 September 2017. We note that the first call date of the OLAMSP 7.000% Perpetual Corp (SGD)s falls on 1 March 2017, and Olam's latest announcement to repurchase the majority of its outstanding SGD perps is in effect a partial call on the bonds, given that the terms of the bond issue mandates a full redemption of all outstanding bonds on its call dates (if the issuer call is triggered).

What should investors do?

Given that Olam has stated its intention to exercise its option to redeem the rest of the notes on the second call date in September, we think that investors in the OLAMSP 7.000% Perpetual Corp (SGD)s should hold on to the notes till the likely September call, earning the 3.5% coupon for an additional 6 months holding period, which we think is a decent return for an exposure to a credit like Olam (whose debt has been priced with the implied backing of state-owned Temasek Holdings in mind). It would also make sense for Olam to exercise the call and fully redeem the perps given that a similar SGD perpNC5 issue is likely to be priced at closer to high-5% given where the OLAMSP 5.350% Perpetual Corp (USD)s are trading at (OAS: 391 over UST; implying a "fair" spread of around 365 bps over SGD Swaps), rather than the 7% it currently pays for the OLAMSP 7.000% Perpetual Corp (SGD)s.

In the unlikely event that Olam chooses not to exercise its call in September, we note that Olam is unlikely to leave the OLAMSP 7.000% Perpetual Corp (SGD)s outstanding beyond Mar 2022 given the rather hefty coupon reset on the 10th year of 5 YR SOR + 4.965% initial margin + 1% step-up margin, which goes some way in mitigating durational risk.

 

The Research Team is part of iFAST Financial Pte Ltd.

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