Olam made an offer to exchange the remainder of its Covertible Bonds (outstanding principal now is US$176.4m) with a new CB at 78% of principal, with 1.2821% coupon due 2013. If taken up, Olam's unadjusted net gearing would immediately be cut to 2.3x from 2.5x (est.), although caveat will still be on small dilution at redemption. Maintain buy with S$1.70 target price.

Offer to exchange the remaining CB. Olam announced that it is offering bondholders to exchange the remainder of the US$300m CB, 1%, due 2013 (outstanding principal now is US$176.4m) with a new CB at 78% of principal at 1.2821% due 2013. The offer will commence today, 17 February 8:00 am and ends 18 February 8:00 am.

Unadjusted net gearing to be cut to 2.3x. If and when the offer is fully taken up, Olam would reduce its outstanding CB to 78% x US$176.4m = US$137.6m and therefore book a gain of US$38.8m in the current financial year. Should we take this into account, Olam's unadjusted FY09F net gearing is estimated to come down to 2.3x from our current forecast of 2.5x.

Small potential dilution. Based on the new terms, bondholders of the new CB would have the option to put at 141.025% on 3 July 2011 (a combination of cash and shares ? up to 10% of issued) ? from 111.11% in the existing CB. The number of shares to be issued will hence depend on volume weighted average price, based on stock settlement option formula. Using conversion price of S$1.656 (previously S$3.8464 in the existing CB), total number of shares to be issued is 125.2m (increased from 62.6m currently), which means Olam could still theoretically redeem all the CB by shares.

TP and recommendation unchanged. Pending the outcome of the take-up, we are maintaining our forecasts. As the potential dilution to Olam's shareholders should remain minimal, we are maintaining our Buy call and TP at S$1.70/share.