Temasek Holdings Pte Ltd, which owns 16 percent of Olam, is fully underwriting the $1.2 billion issue, potentially raising its stake as high as 29 percent over the medium term if other shareholders do not participate.
The move, which was originally proposed by Olam and taken to its banks and then to Temasek, is intended to bolster the commodity firm's liquidity and is seen by analysts as a strategy that could put the squeeze on short-sellers such as Muddy Waters.
Muddy Waters hit back on Tuesday, saying that Olam's decision to raise debt validates its thesis that the company is in danger of failing.
"The $750 million that Olam is raising merely postpones the collapse that we feel is almost inevitable," it said.
Last week, Olam CEO Sunny Verghese told Reuters in an interview that the company had sufficient cash and did not expect to tap the debt markets for at least five to six months.
The main idea behind the fund-raising plan is to "break the negative cycle" of high bond yields filtering through to the equity market, said James Koh, an analyst at Maybank Kim Eng.
The rights issue will be a short-term positive for the stock, Koh said.
"However, management's earlier stance that it could easily survive 12 to 18 months even in a credit market seizure may now sound hollow and minority shareholder confidence may be eroded."
Koh downgraded his rating on Olam shares to "sell" from "hold" this morning and lowered his target price to S$1.42 from S$1.75.
Olam shares were up 3.5 percent at S$1.63 at 0404 GMT, after rising as high as S$1.71 a share.
Bond prices were choppy after rising late on Monday in the wake of the fund-raising announcement. Its bonds due in 2017 are trading at 90/92 cents on the dollar and the 2020s are at 92/93.
Heavy ownership by retail investors, who are attracted to the high yield, make Olam bonds especially volatile - Olam 2020s are nearly half-owned by retail investors and 2017s have 70 percent retail involvement.
LOCKED IN BATTLE
Olam has been locked in a battle with Muddy Waters for the past two weeks. In a 133-page report, the short-seller said aggressive spending, accounting practices and debt levels had left the company on the verge of collapse.
Olam has sued Muddy Waters in a Singapore court and issued a detailed rebuttal of the allegations, saying it was not at risk of insolvency and had enough liquidity.
Temasek said it is supportive of Olam and its strategy to add on more upstream and midstream capabilities.
Olam is issuing a nominal $750 million of 6.75 percent five-year bonds at a price of 95 percent, raising $712.5 million.
The bonds have warrants attached that will allow holders to buy a total of 387 million shares at $1.291, which would raise $500 million if they were all exercised.
Maybank said Temasek's share would rise to 28-29 percent if it takes up all warrants.
OCBC Investment Research said Olam's management hopes the bond issuance will help to dispel any lingering doubts about the company's viability and solvency, thus shoring up its bond and share prices.
"While we think that there could be some near-term boost to its share price, we note that outlook for the next six months remains quite muted," OCBC said. It maintained its "hold" rating and S$1.44 target price on Olam.
Credit Suisse, DBS Bank, HSBC, and J.P. Morgan were joint bookrunners, lead managers and underwriters for the transaction.