Geo Energy Resources launches a consent solicitation and tender offer for its bonds. GEO Energy Resources Chief Executive Officer Tung Kum Hon says the weakening global outlook and demand for coal has increased its need for additional flexibility in light of current market conditions.
Geo Energy Resources, together with its subsidiaries, announces that its wholly-owned subsidiary, GCI has commenced a Consent Solicitation and Tender Offer.
The Consent Solicitation will be open for ten business days from the launch date, while the Tender Offer will be open for 20 business days from the launch date. The final expiration of the entire exercise will be on 18 June 2020.
Purpose of the Offer
The weakening global economic outlook, resulting from the escalation of the COVID-19 pandemic and falling crude oil prices, has had a large impact on the demand outlook for coal and has exacerbated the challenges faced by the Group. Weak demand and an increasingly uncertain price outlook are expected to maintain downward pressure on the low-calorific value Indonesian coal market.
According to GEO Energy, the Group does not meet certain minimum coal reserves requirements on or prior to 4 April 2021.
While it continues to explore potential acquisitions of coal assets, GEO Energy management says it is doing so cautiously, in light of the current market conditions. Furthermore, with an expectation that macroeconomic conditions could worsen if the current COVID-19 pandemic is prolonged, there is no certainty that such acquisitions will materialise between now and 4 April 2021.
GEO Energy says it would not be prudent nor in the long-term interests of its various stakeholders, to enter into acquisitions where the return on investment is limited during this period of challenging market conditions, just to fulfil the minimum coal reserve requirement.
Through the proposed consent solicitation, GEO Energy says it would like to seek the consent of Holders to provide it with additional financial flexibility in light of the current challenging market conditions, and in doing so, be in a better position to address its obligation to Holders come the final maturity date in 2022.
GEO Energy Management claims it is aware that given the current challenging market conditions, some of the remaining Holders may also be seeking liquidity and therefore desire to exit their holdings of the Notes, and as such, it says the Tender Offer may provide an opportunity for Holders to gain liquidity that might not otherwise be available to them. It intends to fund the Consent Solicitation and Tender Offer using existing cash on hand.
Commenting on the Consent Solicitation and Tender Offer, GEO Energy Executive Chairman Charles Antonny Melati says the escalation of the COVID-19 pandemic globally, coupled with the sharp declines in crude oil prices, in the recent months have affected the Asian coal sector.
According to Melati, the demand and price outlook for coal is more uncertain than ever – reduced economic activity in China, its main export market, coupled with the relative attractiveness of cheaper crude oil as an alternate source of energy, have put further pressure on the low-calorific value Indonesian coal market. These factors have impacted coal prices in the past weeks, with the ICI price for 4,200 GAR coal falling from an average of USD34.44 per tonne for the three months ended 31 March 2020 (“1Q2020”) to the recent low of USD24.15 per tonne on 8 May 2020.
“While we have been exploring potential acquisitions of coal assets to grow the Group’s business, it would not be prudent nor in the long-term interests of our various stakeholders, to enter into acquisition(s) where the return on investment is limited during this period of challenging market conditions, just to fulfil the minimum coal reserve requirement ahead of the 4 April 2021 deadline. If the Consent Solicitation is successful, we can remove the uncertainty regarding the Put Option,” says Melati.
Meanwhile, Melati says the Group is also in the process of renewing the licenses of its SDJ and TBR coal mining concessions and conducting new exploration at our TBR concession to increase its JORC proved and probable coal reserves. It is expected that our combined coal reserves of SDJ and TBR will increase from this new exploration in TBR, based on an update letter from SMG Consultants dated 19 May 2020, pending a JORC report to be issued.
GEO Energy Chief Executive Officer Tung Kum Hon says the weakening global outlook and demand for coal has increased the Group’s need for additional flexibility in light of the current challenging market conditions, and in doing this Consent Solicitation and Tender Offer, [they] will be in a better position to address obligations to Holders come the final maturity date in 2022.
“We believe the Consent Solicitation and Tender Offer is an exercise that is favourable to all our stakeholders. To the Holders who choose to tender their Notes, it is an opportunity to get liquidity that may not be otherwise available under current market conditions. To the remaining Holders, the Proposed Amendments will give the Group flexibility to continue its operations and meet its working capital requirements between now and the final maturity date in 2022. If some of the Notes are successfully tendered, the Group will also have an improved capital structure and better credit profile to the remaining Holders and equity investors.Although the tender price is a steep discount to face value, we 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,” says Tung.
According to Tung, should the Consent Solicitation and Tender Offer be successful, they will have gained additional flexibility to make necessary adjustments to operations and capital structure to improve business prospects.
“This can also potentially result in a significant reduction in the Group’s financial obligations. With this, we will continue to assess the market situation and business viability, monetise and continue our SDJ and TBR operations given the potential increased reserves and continue to look for opportunities to create the most value for our stakeholders,” says Tung.
(Ed. For full details of the Consent Solicitation and Tender Offer click here. Deutsche Bank AG, Singapore Branch has been appointed by the Company as Dealer Manager and Solicitation Agent in respect of the Consent Solicitation and Tender Offer.)