Thu, May 21, 2020 – 1:54 PM
GEO Energy Resources’ wholly-owned subsidiary Geo Coal International (GCI) is offering to repurchase the outstanding US$154 million in aggregate principal amount of its 8 per cent senior notes coming due in 2022, at a tender price that is less than half of par value.
At the same time, it has proposed a few amendments to the bond indenture for the noteholders’ approval, to provide the group with “additional flexibility” in light of the current “challenging” market conditions.
The amendments will also place Geo Energy in a better position to address its debt obligations once the bonds mature in 2022, the mainboard-listed Indonesian coal producer said on Thursday.
It noted that the Asian coal sector has taken a hit from the weakening global economic outlook resulting from the Covid-19 pandemic and falling crude oil prices. Weak demand and an increasingly uncertain price outlook are expected to maintain a downward pressure on the Indonesian coal market, Geo Energy added.
It intends to use existing cash on hand to fund both the tender offer for the bond repurchase and the consent solicitation for the amendments.
Some noteholders may wish to exit their holdings and gain liquidity given the “challenging” market conditions, and the tender will thus provide them with the opportunity to do so, the company said.
For the tender offer, GCI is looking to purchase for cash all notes validly tendered before June 4 this year. Holders will receive US$430 per US$1,000 principal amount of the notes, plus accrued and unpaid interest up to but not including the settlement date.
Those who validly tender their notes later – after June 4 but by June 18 – will receive a lower sum of US$400 per US$1,000 principal amount plus accrued and unpaid interest.
Geo Energy chief executive Tung Kum Hon said that although the tender price is at a “steep discount” to face value, the company “can only afford to offer holders as high a consideration as the group’s current liquidity allows, given that it is an any-and-all tender offer”.
“We need to be mindful to set aside some funds for ongoing working capital requirements,” Mr Tum added.
Geo Energy has about US$65 million in cash that can be used to fund the consent solicitation and tender offer as well as the related transaction fees and expenses. The total cash outlay will be some US$66 million, assuming all holders – holding the full US$154 million principal amount – tender by June 4, based on the repurchase price of 43 cents on the dollar.
In explaining why GCI is doing a concurrent tender offer alongside the proposed amendments, Geo Energy executive chairman Charles Antonny Melati said GCI was approached by several noteholders over the past six months to bilaterally repurchase their holdings. GCI bought back the notes from these holders, based on market prices, at varying cash prices ranging from 67.6 per cent in December 2019 to 41 per cent in March 2020.
These repurchases thus reduced the outstanding principal amount on the notes from US$300 million to US$154 million.
As for the proposed changes to the bond indenture, the group is seeking noteholders’ consent to remove the mandatory-offer-to-purchase covenant. This put option requires GCI or Geo Energy to make an offer to buy back all outstanding notes if it fails to satify certain minimum coal reserve requirements by April 4, 2021.
The company currently does not meet these minimum coal reserve requirements. While it continues to explore potential acquisitions of coal assets, there is no certainty these deals will materialise by the April 4, 2020 deadline, seeing as macroeconomic conditions could worsen if the Covid-19 pandemic is prolonged, Mr Melati said.
It will not be prudent nor be in the long term interest of stakeholders to enter into acquisitions where the return on investment is limited, just to fulfil the minimum coal reserve requirement, he added.
To remove the put option, Geo Energy requires the consent of noteholders holding at least 75 per cent of the outstanding aggregate principal amount.
Another proposed amendment is to increase the working capital permitted debt basket by US$15 million, and the general permitted debt basket to US$10 million.
These increases will give the group more flexibility to incur indebtedness for working capital and other corporate purposes, Geo Energy said. This change requires the consent of those holding the majority of the outstanding aggregate principal amount of the notes.
The consent soliciation exercise for the amendments will be open for 10 business days from the launch date of May 21, while the tender offer for the repurchase will be open for 20 business days from the launch date.
The final expiration of the entire exercise will be on June 18, 2020.
Deustche Bank AG Singapore Branch is the appointed dealer manager and solicitation agent.
Shares of Geo Energy Resources were trading at 13.9 Singapore cents as at 1.51pm on Wednesday, down 0.2 cent or 1.4 per cent.