Moody's upgrades Geo Energy after near-term refinancing risk removed

MOODY'S Investors Service has upgraded the corporate family rating of Geo Energy Resources to Caa1, from Caa3 previously.

The credit rating agency also upgraded the senior unsecured guaranteed notes issued by Geo Coal International (GCI), a wholly-owned subsidiary of Geo Energy, to Caa1 from Caa3.

The outlook on these ratings remains stable, Moody's said in a statement on Tuesday.

The upgrades reflect the elimination of near-term refinancing risk for the coal mining group, said Maisam Hasnain, a Moody's assistant vice-president and analyst.

Geo Energy last week announced it had met the conditions required to prevent a put option from being triggered in April 2021 for its US$59.2 million of outstanding 8 per cent senior notes.

The mainboard-listed firm's updated coal reserve report showed that the combined reserves at its two operating mines in Indonesia, Sungai Danau Jaya and Tanah Bumbu Resources, were about 86 million tonnes as at Oct 30, 2020.

That exceeded the minimum requirement of 80 million tonnes that it had to meet under a covenant of the notes. If the covenant had not been fulfilled, GCI would have had to make a mandatory offer to buy back all the outstanding notes.

It also followed Geo Energy's announcement in August that it had secured mine licence extensions at both mines to 2027 and 2028 respectively, from their previous 2022 expiry dates.

As a result, the group satisfied the minimum reserve conditions needed to prevent the triggering of a put option on the notes in the next four months.

That means the US dollar notes will mature in October 2022 as originally scheduled.

Moody's said this gives Geo Energy time to increase cash generation before the notes come due.

Over the past 12 months, the company has in total repurchased about US$241 million of the notes' original US$300 million principal amount, at a considerable discount to the original par value.

Creditors thus saw a "significant loss of value" relative to the original obligation, Moody's said. The remaining outstanding notes total just US$59 million.

However, despite the significantly lower leverage and lower interest costs, Geo Energy's credit profile is still constrained by its small scale and limited financial flexibility, said Mr Hasnain, who is also Moody's lead analyst for the coal miner.

For instance, the company has a low cash buffer, which hinders its ability to make acquisitions in order to grow and replenish its declining coal reserves, he added.

The credit rating agency estimates that Geo Energy will generate sufficient internal cash to repay the outstanding notes at maturity while maintaining a minimum cash balance. However, this limited buffer could erode in the event of persistently low coal prices or cuts in production volumes in the next 12-18 months.

Moody's expects the company may seek to raise money via prepayment facilities under its existing coal offtake agreements to help bridge any small funding gap when its notes come due in October 2022.

Shares of Geo Energy rose 0.4 Singapore cent or 2.3 per cent to trade at 18 cents as at 3.42pm on Tuesday.