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  "documentTitle": "Olam International Ltd. (SGX:O32)",
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  "authorName": "Carson Block",
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  "presentationDate": "2012-11-27 00:00:00",
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  "notes": "This slide argues against management's characterization of RMI as 'cash equivalent' by highlighting operational complexities and derivative risks.",
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      "text": "For all of the reasons stated above, we do not believe that RMI is the cash equivalent that management presents to investors.",
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      "text": "Being long coffee through a Vietnamese subsidiary and short Chicago coffee futures at the parent still has a lot of basis risk, but we believe that this is the type of position that Olam Management includes in the RMI and presents to investors as easily recoverable. We understand that Olam only hedges using front month contracts, and rolls them as delivery date approaches, at which point it covers the short and sells to the customer. In a liquidation scenario, there is no longer any cash for rolling contracts.",
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      "text": "We discussed hedging in greater detail earlier in the report, but it is important to remember that hedges are performed by the parent company, not the subsidiary holding the inventory. Therefore, our Mozambique cotton subsidiary might have a very hard time netting versus a hedge made at the Singapore entity level.",
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      "text": "Our analysis of US customs and shipping data show that sales contracts for certain commodities might be inked at a subsidiary that is totally different from the subsidiary holding the inventory. Indian cashews make their way to Olam USA, Olam Vietnam will move goods to Olam India. The sales process is labyrinthine at best. In a liquidation scenario, it would be excruciating to match up these contracts and manage to deliver inventory effectively enough to ensure a high recovery rate for bondholders. In the credit crisis, matching up CDS contracts between counterparties was almost impossible and the collapse of Lehman created total chaos despite having far fewer subsidiaries and far fewer customers. Simply, if the Singaporean entity is in liquidation, who is going to co-ordinate the shipments between entities and movement of goods?",
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      "text": "In a liquidation scenario, it would be hard for the creditor to take control a subsidiary located in an undeveloped country with few safeguards for foreign investors, shift the inventory to the parent, and then deliver it into a hedged futures contract. The second choice is that the hedges are also not perfect commodity hedges. Experienced professionals know that different commodities trade at different prices all over the world, and that the correlations are not always strong enough to truly offset risk or even to really net out the balances.",
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      "text": "Net derivative assets were S$186 million, however, these include S$322 million in net Level 3 derivatives. Level 3 derivative values are derived from management’s models. Combined with the fact that the majority of the derivatives are meant for hedging, there is a large risk to bondholders should Olam declare bankruptcy and cease normal operations. We also built in assumptions for Olam’s other current assets.",
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      "text": "As evidenced by CFM, there are secured loans also guaranteed by the parent. We are unsure as to how much, but there will be secured creditors standing ahead of unsecured",
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      "text": "The total asset amount recoverable comes to S$5.3 billion. This is what the recoverable assets would be worth if recovered right away.",
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      "text": "For all of the reasons stated above, we do not believe that RMI is the cash equivalent that management presents to investors. Our recovery assumption for inventory incorporates the risks stated above.",
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