Under Fire From Biden, Prison Operators Address Cash Crunch

(Bloomberg) - Private prison operators are rushing to shore up their finances after increasing political pressures over the treatment of inmates and immigrants, casting doubt on their company's long-term prospects.
According to one knowledgeable person, CoreCivic Inc. sold $ 450 million worth of bonds to refinance short-term debt, while Geo Group Inc. announced it would suspend its quarterly dividend in order to prioritize debt repayment and a corporate structure review begin. according to a statement Wednesday.
The companies, the two largest private prison operators in the United States, are grappling with the aftermath of an order issued by President Joe Biden in January ordering the Justice Department not to renew contracts with private prison operators. They also struggled with dwindling funding opportunities after major banks announced they would stop lending to the industry and downgraded their credit ratings.
Despite these challenges, new allies have recently emerged on Wall Street. Imperial Capital Group Inc. led CoreCivic's first bond offering since 2017 on Wednesday, while StoneX Group Inc. helped Geo organize a convertible bond sale in February. The company was also a joint bookrunner for CoreCivic's new bond deal.
"It's not that business just disappears overnight, but it's an operating environment where things seem to be changing," said Joe Gomes, an analyst at Noble Capital Markets, adding it was unclear how that would be Management would make up for lost beds if they did not renew the contracts. "Neither company is entirely sure what exactly the endgame is."
Representatives from CoreCivic and Imperial Capital did not respond to requests for comment. A representative for Geo declined to go beyond the company's statement on Wednesday saying it wanted to channel cash flow to repay debt and fund growth internally.
Higher borrowing costs
Private prison operators also face higher borrowing costs as money managers increasingly include environmental, social and governance criteria in their investment choices. CoreCivic's new notes, which mature in 2026 and will not be redeemable for three years, will be yielding 8.5%, according to the knowledgeable person who asked not to be identified because the details are private. rated.
That's more than two percentage points more than the average return on the lowest-rated junk bonds, which fell to an all-time low of 6.1% on Tuesday. CoreCivic is in the BB range, where bonds averaged 3.2% yield, according to Bloomberg.
Read more: Barclays Bond Deal Shows Limits To Vow In Funding Prison Firms
The Biden regulation, which applies to the U.S. Federal Prison Office and Marshal Service, affects contracts that S&P said accounted for around a quarter of Geo and CoreCivic's revenue last year.
Geo shares fell more than 20% on Wednesday, to their lowest level since 2006, while bonds rebounded as creditors made the company's decision to prioritize debt repayment and reduce leverage on shareholder payouts, consoled something. CoreCivic's stock fell over 17%.
Geo said it is also reviewing its corporate structure as a real estate investment trust, which brings tax benefits but requires minimum dividend payouts to shareholders every year. CoreCivic revoked its REIT structure last year and suspended its dividend to pay off debt.
Pressure from lenders is a major motivator for Geo to consider switching, according to those who know the matter. Bondholders have encouraged the company to prop up finances to best manage its roughly $ 2.6 billion long-term debt. A group of such lenders has examined their options with the law firm Akin Gump Strauss Hauer & Feld, so the respondents cannot be identified by relying on private discussions. A representative of Akin Gump declined to comment.
(Updates to the pricing of the CoreCivic bond offering from the second paragraph and stock prices from the 10th paragraph.)
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