Fitch revises Geo Energy's rating back to CC after failed bond tender offer

FITCH Ratings has revised Indonesian coal miner Geo Energy Energy Resources' long-term issuer default rating to CC from C.

It also changed the rating on the oustanding senior unsecured guaranteed notes of the company's subsidiary, Geo Coal International, back to CC, from C, with a recovery rating of RR4.

The revisions came after Geo Energy failed to achieve the required minimum 75 per cent noteholder acceptance of its tender offer and consent solicitation to remove a mandatory repurchase clause. Geo Energy previously said only 13.8 per cent of the notes amounting to US$21.3 million were validly tendered.

In May, the ratings agency had downgraded the company and the notes to C, shortly after Geo Energy announced it would launch the offer and consent solicitation.

On Wednesday night, Fitch said: "We conclude that Geo Energy's tender offer was unsuccessful, as per our distressed debt exchange (DDE) rating criteria, as the company continues to face heightened default risk in the next 12 months.

"As a result, we have revised its rating to CC, the level at which Geo Energy was rated before the tender offer, since there has been no significant change in its underlying credit profile."

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The CC rating reflects Fitch's view that a default appears probable within the next 12 months. The agency believes Geo Energy will be required to buy back notes in May 2021, as the company is unlikely to meet the condition of 80 million tonnes of coal reserves, which will trigger a put option.

Fitch expects Geo Energy's liquidity to fall "considerably short" of the US$132.7 million principal due on the May 2021 put date if the put option is triggered in April 2021. The agency does not foresee timely refinancing to take place.

Even if it avoids the put option through an asset acquisition or reserve addition at its Tanah Bumbu Resources mine, liquidity on hand will still be insufficient to repay the principal on the October 2022 bond maturity, Fitch noted.

When the consent solicitation and tender offer failed to meet the conditions set forth in the offer, Geo Energy waived the requisite 75 per cent minimum application and bought back the US$21.3 million of validly tendered notes at an average price of US$0.45 per unit (including accrued interest). This reduced its outstanding US dollar note balance to US$132.7 million.

However, this buyback did not qualify as a DDE under Fitch's criteria, as the deal failed and the untendered noteholders remain exposed to a high risk of default.

Fitch expects Geo Energy's liquidity to decline further, as cash generation is likely to remain weak in the near term in light of low coal prices and the company's weak cost position.

"We estimate that Geo Energy's cash balance fell to around US$80 million in June 2020 after its latest bond buyback," it said.

Separately, Geo Energy on Tuesday disclosed that its subsidiaries and other parties are facing a legal claim filed by the ultimate shareholder of Titan Infra Energy (TIE), which alleged that the conditional sale as well as purchase and coal off-take agreements between TIE and the Geo Energy subsidiaries were against the interest of TIE's shareholders.

Fitch noted that Geo Energy made an advance payment of US$32 million to TIE in 2019 for the coal offtake in 2020. The agency said it will monitor the situation and assess the impact on Geo Energy upon greater clarity.

Shares in Geo Energy last traded at 11.9 Singapore cents on July 1.