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.
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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
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am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
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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.
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