Muddy Waters Offers Up Green for Olam Debt Rating

November 30, 2012 9:58 AM EST
"You know, George Washington would rate that debt" - Muddy Waters (supposedly) to S&P, while dangling a dollar bill.

According to reports out Friday, notorious short-seller Muddy Waters, and its founder Carson Block, are offering to pay Standard & Poor's to rate the corporate debt of Olam International, which recently sued Muddy over defamation.

Muddy released a statement, which said in part that investors would benefit from the public rating of Olam's debt. Since Muddy took it to Olam on November 19th, Olam has raised its capital spending plans. Muddy thinks this move will increase Olam's risk of failure.

Olam's CEO isn't taking it sitting down. Regulatory filings show Sunny Verghese purchasing 1 million shares today, boosting his stake in the company to 4.67 percent.

The following are points from Muddy Waters' letter (more here):

* We hereby make a bona fide offer to pay for Olam to have one of its public debt issues rated by S&P. It is Olam that suggested investors analyze the Company per a 12-year old research piece on agricultural commodity inventories by Standard & Poor’s. We believe that Olam should not stop there though. The Company has never before had a debt rating, and having Olam’s debt rated by S&P would be an important step toward improving the Company’s transparency. Because we will pay the expense, Olam has no good reason not to have a rating.

* Olam's response to our criticism of the Crown Flour Mill acquisition resoundingly affirms our thesis that Olam’s acquisitions are destroying value at an alarming rate. Olam states that CFM is one of its best performing acquisitions. If CFM is the high water mark, investors should brace for impact. Olam also cites the growth in CFM’s SGD revenue from FY2009 to FY2011 as evidence of a successful turnaround. The problem is that the increased revenue came almost exclusively from inflation in wheat prices and increases in the value of the SGD relative to the NGN. CFM’s FY2011 PAT margin declined from 2.5% to only 0.9%.

* Olam is using Ernst &Young to deflect questions about its accounting; however, E&Y is irrelevant to the issues. Many corporate collapses and frauds had top tier auditors, including Sino-Forest, which was also audited by E&Y.

* In its 45-page response, Olam responded to only one of the 79 unexplained accounting revisions (totaling over S$2.7 billion in absolute value) we identified in Olam’s historical Statements of Cash Flows. We do not quite know what to make of its response though. Olam is essentially admitting that its initial Statement of Cash Flows failed to include a significant amount of transaction costs, and that its auditor likely spotted the problem. This answer only serves to reinforce our thesis that Olam’s accounting functions are at best incompetent.

* Shareholders might have reason to worry that senior management could be facing margin calls (that could cause it to liquidate Olam shares) because it possibly pledged significant numbers of shares. Mr. Verghese refused to answer a question about share pledges on a recent conference call, so management’s motivation for its fierce salvo against Muddy Waters is possibly not transparent. On the other hand, Muddy Waters has always been transparent about our economic incentives. We do, however, draw the line at being called “manipulators” and being accused of acting in concert with a group of hedge funds to drive down the price of Olam’s shares. Mr. Verghese’s statements accusing us of this behavior are defamatory, and we demand a full retraction and apology. We reserve the right to pursue legal action against him and Olam for these baseless statements.

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