Geo Energy's move to improve financial flexibility at noteholders' expense: Moody's

INDONESIAN coal producer Geo Energy Resources' consent solicitation and tender offer will improve its financial flexibility at the expense of noteholders, said credit rating agency Moody's on Friday. 

Mainboard-listed Geo Energy on Thursday announced a consent solicitation to approve certain amendments to the indenture governing its 8 per cent senior notes due in August 2022.

One of the proposed amendments is to remove a put option that demands that Geo Energy or its subsidiary, Geo Coal International, buy back all outstanding notes if it fails to satisfy certain minimum coal reserve requirements by April 4, 2021. Geo Energy does not have sufficient coal reserves at its two operating mines to prevent the put option.

The company, through its subsidiary, is also offering to repurchase by tender the US$154 million principal outstanding under these notes, at a price that is less than half of the par value. Noteholders who accept the tender offer will also be deemed to have granted consent to the company's proposed amendments mentioned earlier.

Therefore, "the proposed amendments and the tender will provide Geo Energy with much needed flexibility under its financial obligations, given its weak credit profile", wrote Moody's analysts in a note on Friday.

They pointed out that this will be at the expense of noteholders, "which are being asked to accept these terms at the risk of being faced with potentially more onerous terms in 12 months' time, if Geo Energy's credit profile continues to deteriorate".

Before the tender offer, Geo Energy had cumulatively repurchased US$146 million of the notes between December 2019 and April 2020 at a "sizable discount" to the original par value. Moody's added: "In March, we recognised the continued discounted buybacks as a distressed exchange, which is a default event under our definitions."

If the latest tender offer is accepted by all noteholders, Geo Energy will have repurchased its entire US$300 million notes at around a 50 per cent discount to the original par value, the analysts said. 

In addition, repurchasing the principal on all outstanding notes will cost Geo Energy some US$66 million, based on the repurchase price of 43 cents on the dollar. It would see Geo Energy's subsequent cash balance fall to US$15 million, leaving the company with a very low liquidity buffer to manage volatility in its operations, particularly given its small scale and exposure to thermal coal prices, which are considerably lower than in recent years, said Moody's. 

The consent solicitation and tender offer closes on June 18.