Olam: Muddy Waters questions accounting practices

Sunny Verghese
Image caption Olam chief executive Sunny Verghese has alleged that Muddy Waters was looking to profit from shorting Olam's stock

Muddy Waters Research has released a report it says will back up claims that agricultural commodities trader Olam International "will collapse".

The report questions Olam's accounting practices and says it bears "uncanny" similarities to failed US firm Enron.

Muddy Waters, a US short-seller that has previously gone after Chinese firms, first attacked Olam last week.

Singapore-based Olam said there was "no substance" to the report's broad allegations.

"We will clear our name and hold Muddy Waters accountable for their damaging actions," Olam said.

It added that it would continue to study the report in greater detail and would provide a fuller response in due course.

It has denied Muddy Waters' earlier claims and has started legal action against the firm.

Olam said Muddy Waters made the claims to "create panic among shareholders" and to profit from its short position on its shares.

Short sellers look for assets they believe to be overvalued. They then borrow shares in the firm, sell them and hope to buy them back at a cheaper price, pocketing the difference.

Olam's shares fell 6% in Singapore after the report was published.

'Accounting gaffes'

Muddy Waters has trained its eye on a number of other firms in the past, most notably China's Sino Forrest, with varying degrees of success.

In its report on Olam, Muddy Waters said that it carried out three months of research into the business and stood by its claims.

The US firm alleges that Olam has produced some of the "worst accounting gaffes", adding that some of Olam's accounting revisions "are so unusual as to suggest irregularities".

Muddy Waters also said that it could not account for 996.2m Singapore dollars ($815m; £510m) worth of capital expenditure made by Olam over the past four years.

"We believe that the bondholders in particular should be asking where their money has gone, and how they will get it back," Muddy Waters said in its report.

Muddy Waters claimed that some of the practices being followed by Olam were similar to those of Enron, which went bankrupt in 2001.

It pointed out that Olam's profits were also being boosted by "non-cash accounting gains".

But Olam said it had "complete confidence in its strong, differentiated business model, which has allowed us to build leadership positions in various businesses".

"As stated by us in the past and also reported by many independent experts in the media, our accounting practices are fully compliant with international accounting standards, which are independently verified by Ernst & Young and are drawn up in accordance with the provisions of the Companies Act and Singapore Financial Reporting Standards," the firm said.

Asset values

At the heart of Muddy Waters' claims is how Olam values its assets.

According to the US firm, Olam now shows many of the assets as being more valuable than when it bought them. And it has booked the difference in the purchase and as profit in its balance sheets.

However, it alleges that the difference in price is not because Olam acquired the assets at a bargain but because it revalued them at the time of acquisition.

At the same time, Muddy Waters also questioned increases in the value of Olam's biological assets, another stream of money that is now a key part of the firm's profits.

"Biological gains for each period are determined via an internal model that has numerous inputs that are not made public - as a result, it could be susceptible to manipulation by [the] management," Muddy Waters said in its report.

Muddy Waters added that there were "uncanny" similarities between the two firms' accounting practices and that the collapse of Enron should serve as a warning to investors.

"We believe that the single biggest factor in Enron's collapse was its use of accounting techniques similar to Olam's value gains."

Debt levels

As well as the non-cash accounting gains, Muddy Waters questioned how Olam would continue to finance its business, claiming the firm only had three weeks' worth of working capital.

It said that the company's cash flow was more limited than first thought, and that it funded large parts of its business through expensive overdrafts.

On top of that, it would have to "raise or refinance as much as 4.6bn Singapore dollars over the next 12 months in order to stay solvent".

"We believe our model assumptions are conservative," Muddy Waters said.

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