Bad Press and Lawsuits Are No Obstacle to a $610 Million Prison Loan

(Bloomberg) -- Correct Care Solutions operates in an industry that lots of people love to hate.

It provides health care to prisons and jails, a sector that’s subject to frequent litigation and often critical scrutiny from public officials and inmate-advocate groups.

Now, along with that baggage, it wants a loan carrying risky terms -- and Wall Street is happy to provide it. While a few investors balked, Correct Care has won enough lender support for $610 million in leveraged loans backing its buyout by private equity firm HIG Capital LLC, according to people familiar with the matter.

The deal’s expected success shows again how lenders, flush with money, are accepting aggressively structured deals -- even from risky borrowers -- because there aren’t enough higher yielding assets to meet rising demand. That’s even though one of the year’s biggest leveraged-loan deals was inked this week and new loans are on track for a record-setting year, according to data compiled by Bloomberg.

Biggest Player

HIG agreed to buy Correct Care Solutions LLC in July to merge it with Correctional Medical Group Cos., a regional rival already in its portfolio. The combined company is expected to become the biggest player in the correctional health-care sector in the U.S., according to Moody’s Investor Service.

In response to a request for comment, a Correct Care representative referred to the firm’s annual combined client retention rate of 97 percent, citing it as a key element of each company’s organic growth that surpassed levels in the market. Miami-based HIG didn’t return an email and a phone call seeking comment. Credit Suisse Group AG and Jefferies, the two main banks arranging the financing, declined to comment.

Correct Care, based in Nashville, Tennessee, now gets nearly half of its revenue from local detention centers, which hold inmates awaiting trial or serving short sentences, according to S&P Global Ratings. Another third is from state and federal institutions holding inmates on longer sentences.

Boosting Debt

Investors who signed on to the loan say the merger will help the company gain a bigger footprint into the largely untapped behavioral health segment, which includes providing mental illness and addiction services, according to people familiar with the matter.

Yet the financing -- from a combination of existing and new creditors -- would boost Correct Care’s debt, relative to earnings, to a high level, according to ratings agencies. Leverage for the combined company will balloon to about 10.6 times this year before falling to about 7.5 times in 2020, according to S&P. Deals that go above 6 times leverage are generally considered aggressive.

One investor, who asked not to be identified, said he was put off by those financial terms as well as the negative publicity the company has received because of lawsuits. There have been hundreds of suits involving Correct Care or its affiliates in the past five years, according to data compiled by Bloomberg. Complaints against the company include prisoner conditions, medical malpractice and wrongful death.

Prison Profit

Companies that seek to profit from prisons have found themselves in hot water before.

Securus Technologies Inc. and Global Tel*Link Corp., two leading providers of phone services to detention centers, faced serious threats to their business models in 2015, when the U.S. Federal Communications Commission imposed caps on the price they could charge inmates for calls.

Prison health-care companies have their own problems, including significant delays in care because of too few medical staff, said Bianca Tylek, founder of Corrections Accountability Project, a nonprofit opposed to privatization in the criminal justice system.

"As with all monopoly concerns,” she added, “the bigger these companies get, the more problematic they become and largely because they’re serving a captive market, literally.”

©2018 Bloomberg L.P.