US private prisons rush to repair finances as pressure from Biden intensifies | Economic and economic news
Private prisons in the United States face many funding challenges, but new allies appear to be emerging on Wall Street.
Private prison operators are rushing to shore up their finances after mounting political pressure over the treatment of inmates and immigrants has cast doubts on their businesses’ long-term prospects.
CoreCivic Inc. is borrowing $ 400 million to refinance its short-term debt, while Geo Group Inc. has announced that it will suspend its quarterly dividend to prioritize debt repayment and begin a review of its corporate structure , according to separate statements Wednesday.
The companies, the two largest operators of private detention centers in the United States, face fallout from an executive order by President Joe Biden in January that ordered the Department of Justice not to renew contracts with prison operators private. They were also faced with a decrease in funding options after the big banks announced they would no longer lend to the sector and suffered downgrades to their credit ratings.
Despite these challenges, new allies have recently emerged on Wall Street. Imperial Capital Group Inc. stepped in to lead CoreCivic’s bond offering on Wednesday, which is the company’s first since 2017, while StoneX Group Inc. helped Geo organize a convertible bond sale in February. The company is also an associate bookrunner under CoreCivic’s new bond agreement.
“It’s not like the business is going to die out overnight, but it’s an operating environment where things seem to be changing,” said Joe Gomes, analyst at Noble Capital Markets, adding that it’s unclear how the administration would compensate for the lost beds by not renewing. the contracts. “None of the companies know exactly what the end of the game is.”
Representatives for CoreCivic and Imperial Capital did not respond to requests for comment. A representative for Geo declined to comment beyond the company’s statement on Wednesday, in which it said it aimed to direct cash flow to service debt and fund organic growth.
Higher borrowing costs
Private prison operators also face higher borrowing costs, as fund managers increasingly incorporate environmental, social and governance criteria into their investment selection. CoreCivic’s new notes, which will expire in 2026 and won’t be callable for three years, could bring in around 8.5%, according to a person familiar with the case, who asked not to be identified as the details are private. .
That’s more than two percentage points higher than the average yield on the lowest-rated junk bonds, which fell to an all-time low of 6.1% on Tuesday. CoreCivic is in the BB bucket, where bonds return on average around 3.2%, according to data compiled by Bloomberg.
The Biden Order, which applies to the United States Federal Bureau of Prisons and the US Marshals Service, affects contracts that accounted for about a quarter of Geo and CoreCivic’s revenue last year, according to S&P.
Geo’s stock fell more than 19% on Wednesday to its lowest level since 2006, as its bonds rallied as creditors took comfort in the company’s decision to prioritize debt repayment and reduce its debt in relation to payments to shareholders.
The company said it is also reviewing its business structure as a real estate investment trust, which brings tax benefits but requires minimum dividend distributions to shareholders each year. CoreCivic revoked its REIT structure last year and ended its dividend to repay debt.
Pressure from lenders is a key motivator behind Geo considering the change, according to people with knowledge of the subject. Bondholders urged the company to consolidate its finances to better manage its long-term debt of about $ 2.6 billion.
A group of such lenders have discussed their options with law firm Akin Gump Strauss Hauer & Feld, according to people, who asked not to be identified citing private discussions. A representative for Akin Gump declined to comment.