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Rating Action:

Moody's downgrades Geo Energy to Caa3; recognizes distressed exchange

20 Mar 2020

Singapore, March 20, 2020 -- Moody's Investors Service has downgraded the corporate family rating (CFR) of Geo Energy Resources Limited to Caa3 from Caa1.

In addition, Moody's has downgraded to Caa3 from Caa1 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 a material deterioration in Geo Energy's liquidity following the company's continued discounted buybacks of its US dollar notes," says Maisam Hasnain, a Moody's Assistant Vice President and Analyst.

"In addition, we believe that continued discounted buybacks represent an aggressive financial policy, particularly when the company needs to preserve cash to make an acquisition to prevent a put option on its bond by April 2021," adds Hasnain, also Moody's Lead Analyst for Geo Energy.

On 17 March, Geo Energy announced it spent $42.8 million to buy back $75.8 million in principal on its US dollar notes.

Cumulatively, Geo Energy has now repurchased around $111 million of its original $300 million principal amount, at a considerable discount to the original par value. Moody's deems these transactions to constitute a distressed exchange, which is a default event under the rating agency's definition.

Pro forma for the notes buybacks in March, Moody's estimates Geo Energy's cash balance would decline to around $84 million from $139 million at 31 December 2019.

While debt buybacks will reduce the company's financial leverage and interest costs, continued buybacks at significant discounts indicate a loss of value for creditors.

Geo Energy's cash balance will decline materially if its pending investment in two coal mines in South Sumatra from Titan Infrastructure Energy (TIE) is completed by 31 March 2020.

Moody's estimates Geo Energy will need to pay around $22.5 million to purchase its stake in the two mines, and an additional $32.5 million in a refundable security deposit to secure the use of TIE's haul road and coal terminal for 10 years. This expenditure would eliminate a bulk of Geo Energy's remaining cash, leaving the company with a very small buffer to manage any volatility in its operations.

Should the investment in the South Sumatra mines be delayed beyond the 31 March deadline or even cancelled, this would only temporarily preserve Geo Energy's liquidity.

This is because without this investment, and in the absence of alternative investments, 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 US dollar notes. This will lead to elevated liquidity and refinancing risk because Geo Energy's cash would be insufficient to fully redeem the remainder of its notes.

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 extremely weak credit profile 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 large losses for noteholders as Geo Energy's cash would be insufficient to fully redeem the remainder of its outstanding notes.

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 cash balance continues to decline, 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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JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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