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Rating Action:

Moody's affirms Geo Energy's Caa3 ratings and revises outlook to stable

20 Aug 2020

Singapore, August 20, 2020 -- Moody's Investors Service has affirmed the Caa3 corporate family rating (CFR) of Geo Energy Resources Limited and the Caa3 senior unsecured guaranteed notes issued by Geo Coal International Pte. Ltd., a wholly-owned subsidiary of Geo Energy.

At the same time, Moody's has revised the outlook to stable from negative.

"The ratings affirmation and outlook revision to stable reflects the reduction in near-term refinancing risk for Geo Energy, as its mine license extensions and higher coal reserves will help it meet the conditions required to prevent the triggering of a put option on its US dollar notes in April 2021," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

RATINGS RATIONALE

On 13 August, Geo Energy announced that it had secured mining license extensions for its two operating mines, PT Sungai Danau Jaya (SDJ) and PT Tanah Bumbu Resources (TBR) to 2027 and 2028, respectively, from 2022. The company also announced that SDJ and TBR have increased their combined coal reserves to 87.5 million tons (MT) as of 30 April 2020, up from 64.8 MT at the end of 2019 [1].

Both of these factors indicate the company will satisfy the minimum reserve conditions needed to prevent the triggering of a put option on its outstanding US dollar notes. These minimum reserve conditions include (1) extension of existing mining licenses at SDJ and TBR to beyond 4 October 2025 and (2) having more than 80 MT of coal reserves, with the reserves measured no earlier than six months before 4 April 2021.

As a result, Moody's expects the notes will mature as originally scheduled in October 2022. This affords the company more time to improve its credit profile and increase cash generation prior to its outstanding notes maturity.

However, with total proved and probable reserves of 87.5 MT as of 30 April, Geo Energy has a relatively short reserve life of about seven years at its target production level of 12 MT per annum.

"Moreover, the company's low cash buffer, which has declined considerably this year on continued debt buybacks, constrains its scale and limits its ability to make acquisitions in order to grow and replenish its declining coal reserves," adds Hasnain, also Moody's Lead Analyst for Geo Energy.

Over the last nine months, Geo Energy has used its cash on hand to repurchase around $190 million of its original $300 million principal amount on its US dollar notes at a considerable discount to the original par value. In March 2020, Moody's recognized the company's discounted buybacks as a distressed exchange, which is a default under the rating agency's definition.

While Geo Energy's financial leverage and interest costs have fallen, the bond buybacks have crystallized a significant loss of value for creditors relative to the original obligation. In addition, although the near-term refinancing risk has been alleviated, it has not been entirely eliminated, given $110 million of notes will mature in October 2022.

Moody's expects Geo Energy to have sufficient cash to meet its cash needs over the next 18 months, but without a material improvement in coal prices, its cash buffer will likely be insufficient to repay its outstanding notes when they come due in October 2022.

Moody's also expects Geo Energy's ability to raise debt to refinance its outstanding notes will be challenging because the company's credit profile will weaken as its existing coal reserves continue to decline.

ESG CONSIDERATIONS

Geo Energy faces elevated environmental risks associated with the coal mining industry, including carbon transition risks as countries seek to reduce their reliance on coal power.

Geo Energy's two operating mines are adjacently located in South Kalimantan and vulnerable to adverse weather. For example, operations at one of its mines were temporarily halted for around a week in June 2019 due to prolonged flooding.

Geo Energy is exposed to social risks associated with the coal mining industry, including health and safety, responsible production and societal trends. The company has implemented an Environmental and Social Management System, which seeks to address issues such as workplace health and safety procedures, and local community development.

With respect to governance, Geo Energy's ownership is concentrated in its promoter shareholders, who own around 39% of the company. Other governance risks entail the company's financial policies including willingness to use cash for discounted notes repurchases, resulting in a loss of value for creditors relative to the original obligation.

OUTLOOK

The outlook is stable, reflecting Moody's expectation that Geo Energy will have sufficient cash sources to meet its cash needs over the next 12-18 months, and that it will maintain sufficient coal reserves to prevent a put option being triggered on its US dollar notes in April 2021.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the ratings if Geo Energy (1) improves its earnings and operating cash flow on a sustained basis, (2) maintains a sufficient cash balance to meet its cash needs over the next 12-18 months, and (3) increases its coal reserves.

On the other hand, Moody's could downgrade the ratings if (1) Geo Energy's cash balance declines materially, such that its cash sources would not be sufficient to meet its needs over the next 12-18 months, or (2) there is an unforeseen reduction in coal reserves when Geo Energy updates its coal reserve report in October.

The principal methodology used in these ratings was Mining published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1089739. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in 2008 and listed on the Singapore Stock Exchange in 2012, Geo Energy Resources Limited is a coal mining group with mining concessions in South and East Kalimantan. Its promoter shareholders, including Charles Antonny Melati and Huang She Thong own around 39% of the company.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

REFERENCES/CITATIONS

[1] Geo Energy SGX announcement 13-Aug-2020

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maisam Hasnain, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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