Moody's upgrades Geo Energy on absence of near-term refinancing risk

Singapore

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.

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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 the 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.

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.

Moody's 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 if coal prices stay persistently low or production volumes are cut in the next 12 to 18 months.

The credit rating agency 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 become due in October 2022.

Shares of Geo Energy rose 0.1 Singapore cent or 0.6 per cent to finish Tuesday at 17.7 Singapore cents.