Moody's downgrades Geo Energy to Caa1; outlook remains negative

(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. (ends)