Biden Order Hits Private U.S. Prisons’ Credit Ratings

For years, private U.S. prison companies have faced scrutiny from social justice advocates, politicians and investors. Now that the Biden administration is severing the federal government’s ties, the industry’s creditworthiness is taking a hit.

On Wednesday, S&P Global Ratings lowered its credit ratings on Geo Group Inc. and CoreCivic Inc. -- the nation’s largest operators of private detention facilities -- citing growing questions about the outlook for the companies’ profits and concerns over their ability to refinance debt. A few hours later, Moody’s Investors Service took similar actions on both companies.

The review was prompted by President Joe Biden’s executive order in January that instructed the Department of Justice not to renew contracts with private prisons. These deals accounted for about 27% of Geo’s revenue and 24% of CoreCivic’s revenue last year, according to S&P.

“The controversial topic of human rights, combined with evolving public sentiment and policy views on criminal justice reform, expose privately operated criminal detention facilities operators to ongoing social and governance risks,” S&P said in a report.

From S&P, Geo suffered a two-notch downgrade to B, a junk rating five steps below investment-grade, in spite its having sold a convertible bond last month. S&P said the company may struggle to refinance $1.7 billion of debt maturing in 2024 and warned that it may cut the company’s rating further over the next 12 months if Geo doesn’t make progress in lowering that risk.

CoreCivic, which has already begun diverting cash flow to debt repayment, saw a more modest one-notch downgrade from S&P to BB-, or three levels below investment grade. S&P said the company’s $1 billion of debt maturing by mid-2023 is manageable if the company continues on its debt paydown path.

Moody’s lowered Geo’s rating to B2 and CoreCivic’s to Ba2, or five and two notches into junk, respectively. It said that while the private prison industry could transform itself by selling or leasing detention facilities rather than operating them, the outlook for federal agency contracts remains uncertain.

Geo’s bonds maturing in 2024 have been trading at around 80 cents on the dollar, while CoreCivic’s notes due in 2027 last traded at 89 cents on Tuesday, according to Trace.

Both companies have seen their financing options dwindle in recent years, after major investment banks pledged to cut ties with private prison operators and as money managers face increased pressure to incorporate environmental, social and governance criteria into their investment selection.

©2021 Bloomberg L.P.

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