Geo Energy Resources #B# Rating Affirmed On Upsized Outlook Bonds Affirmed At #B#

Stocks and Financial Services Press Releases Thursday September 28, 2017 18:00
SINGAPORE--28 Sep--S&P Global Ratings

SINGAPORE (S&P Global Ratings) Sept. 28, 2017--S&P Global Ratings affirmed its 'B' long-term corporate credit rating on Singapore-based coal producer Geo Energy Resources Ltd. The outlook is stable. We also affirmed our 'B' long-term issue rating on the senior unsecured notes issued by Geo Coal International Pte. Ltd. (GCI) and unconditionally guaranteed by Geo Energy and substantially all of the company's subsidiaries.

On Sept. 28, 2017, S&P Global Ratings revised its assessment of Geo Energy's financial risk due to the upsized bond issuance. The transaction size was increased to US$300 million from US$250 million, which raises the company's

leverage and worsens its interest coverage metrics. We now expect the ratio of funds from operations (FFO) to debt to average about 25% over the next two years, compared with our previous estimate of slightly above 30%.

Additionally, we expect FFO coverage of interest will average below 5x, compared with above 6x previously. This represents a more aggressive financial risk profile, in our view.

This higher credit risk is partially offset by an improved liquidity position. The company intends to use the proceeds to increase its cash balance and reduce reliance on using production prepayments to fund working capital. We expect additional cash to be used for future acquisitions, so we do not expect the company to reduce leverage in the near term.

We believe the management team's intent to acquire assets introduces event risk. Geo Energy plans to acquire producing assets, or assets that can begin production in less than six months. This could add to reserves and mitigate risks related to the average reserve life. However, there is risk that the company could deviate from this policy. We view a large investment followed by a decline in coal prices as a major risk to the credit rating, which could be exacerbated by a higher debt load.

The stable outlook reflects our expectation that Geo Energy will maintain a sound cash buffer over the next 12 months, given the additional liquidity provided by the notes proceeds and steady cash flows from growing production over the period. It also reflects stable and profitable operations at SDJ.

We could lower the rating if Geo Energy's liquidity weakens materially. This could materialize if a sharp fall in realized prices and profit per ton coincides with substantial cash outlays from acquisitions. We could also lower the rating if the company maintains cash or available bank facilities of less than US$50 million.

An upgrade is dependent on Geo Energy lengthening its track record of operations at a larger size with reduced execution risk and with a record of cash accumulation sufficient to cushion price and margin fluctuation through apricing cycle. We believe that sufficient buffer required to achieve a higher rating would entail production being sustained at about 15 million tons per   year while EBITDA per ton exceeds US$15 with longer reserve life.

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