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Geo Energy downgraded by Fitch after bond tender offer

FITCH Ratings has downgraded coal producer Geo Energy Resources Limited’s long-term issuer default rating IDR to C from CC.

It has also downgraded the rating on subsidiary Geo Coal International Pte Ltd’s outstanding senior unsecured guaranteed notes to C, from CC, with a recovery rating of RR4.

The downgrade follows mainboard-listed Geo Energy’s tender offer and consent solicitation to change the protective covenant of its US dollar notes due 2022.

Fitch considers this to be a distressed debt exchange as it believes Geo Energy's exchange offer was made to avoid payment default in May 2021, given its tight liquidity.

Fitch thinks Geo Energy will be required to buy back notes in May 2021 as per the note terms, as it is unlikely to meet the condition of 80 million tonnes of coal reserves, which will trigger a put option.

The group had about US$80 million in cash as at end-April 2020, against the outstanding US dollar notes of around US$154 million.

Geo Energy has offered cash payments of US$430 for each US$1,000 of existing notes tendered before June 4, 2020. For notes tendered after June 4, but before the June 18 deadline, the offer encompasses cash payments of US$400 for each US$1,000 of existing notes.

The tender offer and covenant change are subject to no less than 75 per cent participation in terms of the aggregate outstanding principal amount.

The company’s operating profile has weakened significantly, noted Fitch, with a minimal safety margin for operations amid weak coal prices and falling reserves.

"We expect Geo’s cash balance to be sufficient to fund the tender offer, even assuming all bond holders accept the offer. However, its liquidity will deteriorate post tender, with the cash balance falling to around US$10 million by end-June 2020," said Fitch.

"We also expect Geo’s cash generation to remain weak in the near term, given the low coal prices and its weak cost position. Access to new funding is likely to be challenging in light of the macro conditions, though Geo has availed funding in the past in the form of advances from key customers; commodity trading companies."

Shares in Geo Energy closed at 13.2 Singapore cents on Friday, down 0.6 Singapore cent or 4.35 per cent.

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