Singapore, March 13, 2020 -- Moody's Investors Service has downgraded the corporate family rating
(CFR) of Geo Energy Resources Limited to Caa1 from B3.
In addition, Moody's has downgraded to Caa1 from B3 the senior unsecured
guaranteed notes issued by Geo Coal International Pte. Ltd.,
a wholly-owned subsidiary of Geo Energy.
The outlook on these ratings remains negative.
RATINGS RATIONALE
"The downgrade reflects Geo Energy's weak credit metrics and deteriorating
liquidity given its declining cash balance, and the heightened uncertainty
around its ability to increase its coal reserves, which is needed
to prevent triggering a put option on its US dollar notes by April 2021,"
says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.
In the fourth quarter of 2019, Geo Energy's cash balance declined
considerably to $139 million at 31 December from around $184
million at 30 September. The decline was primarily due to a $32.5
million prepayment on its coal offtake agreements with Titan Infrastructure
Energy (TIE), and a $10.7 million payment to redeem
part of its US dollar notes.
Geo Energy's cash has declined by a further $12.6
million in March 2020 as it redeemed an additional $19 million
in principal on its US dollar notes.
The cash decline reduces Geo Energy's liquidity buffer to acquire
additional coal mines, and weakens its ability to manage volatility
in its operations, which remain highly susceptible to changes in
coal prices given the company's small scale.
Geo Energy's liquidity risk is further exacerbated by uncertainty
around its coal reserves, which are crucial in preventing a put
option from being triggered on its US dollar notes by April 2021.
The deadline for the company's pending investment in two coal mines
in South Sumatra from TIE, has been extended twice, most recently
to 31 March 2020.
Without this investment, Geo Energy is unlikely to have the 80 million
tons of minimum coal reserves it needs by 4 April 2021 to avoid triggering
the put option on its notes. This will lead to elevated liquidity
and refinancing risk because Geo Energy's cash would be insufficient
to fully redeem its US dollar notes.
"Even if the South Sumatra mine investments are completed within
the deadline, we estimate Geo Energy's adjusted leverage will
be 7x -- 9x over the next 12-18 months. Such high leverage,
if continued, points towards an untenable capital structure,
which increases the likelihood of a distressed exchange on Geo Energy's
US dollar notes," adds Hasnain, also Moody's Lead
Analyst for Geo Energy.
On 9 March, Geo Energy spent around $12.6 million
to repurchase $19 million in principal on the notes. This
is the company's second notes buyback since it spent $10.7
million to repurchase $16.1 million in principal on the
notes in December 2019. The notes continue to trade at a considerable
discount to par value.
Moody's definition of distressed exchanges, which it sees
as a default, captures cumulative losses for investors. Incremental
discounted notes repurchases, should they occur, could be
treated as a distressed exchange when viewed in combination with its completed
buybacks.
The ratings also consider Geo Energy's exposure to environmental,
social and governance (ESG) risks as follows:
First, 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. However,
the risk is somewhat mitigated as Geo Energy's customers are primarily
located in Asia, a region with growing energy needs. Also,
Geo Energy has off-take agreements with global commodity traders
to purchase Geo Energy's coal for export.
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
due to prolonged flooding. However, the company's planned
mine acquisitions in South Sumatra will reduce such operational concentration.
Second, 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.
Finally, with respect to governance, Geo Energy's ownership
is concentrated in its promoter shareholders, who own around 39%
of the company. Governance risks considered also include financial
policies around tolerance for high leverage and uncertainty around further
discounted bond buybacks.
The outlook is negative, reflecting Geo Energy's weak credit metrics
and uncertainty over its current ability to prevent the put option on
its US dollar notes from being triggered in April 2021, which if
triggered would lead to elevated liquidity and refinancing risk.
Upward pressure on Geo Energy's ratings is unlikely, given the negative
outlook.
Nevertheless, Moody's could stabilize the outlook if Geo Energy
materially improves its financial profile, and effectively executes
its plan to acquire new mines to ramp up production and improve its mine
reserve life, effectively removing risk from the bondholder put
option.
On the other hand, Moody's could further downgrade the ratings if
Geo Energy's operating performance does not materially improve,
or if it fails to acquire coal assets that improve its credit profile
in the near term and eliminate the risk of its put option being triggered
in April 2021.
In addition, an inability to extend the licenses on its current
mining concessions at substantially similar terms would likely lead to
a rating downgrade.
The principal methodology used in these ratings was Mining published in
September 2018. 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,
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 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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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