💥Will the Biden Administration Disrupt Private Prisons? Part II.💥
🚨Geo Group Inc. ($GEO)🚨
We dug deep into the private prison space with our coverage of Corecivic Inc. ($CXW) a few weeks ago so it’s only fair we discuss Geo Group Inc. ($GEO) — the second largest operator of private prisons and immigrant detention centers in the US. Per Geo’s FY 2020 10-K, Geo’s operations consist of 93,000 beds across 118 facilities (including 11 idle facilities).
As we stated with CXW, sentiment for private prisons is incredibly negative. Government officials are applying political pressure (see here and here), and major Wall Street banks have gone on record saying they would stop financing private prisons over ESG concerns (even though sometimes they still do).
Adding in the impact from COVID, the situation for private prisons seems downright dire. Disclosure from Geo indicates that over the course of 2020, the Federal Bureau of Prisons decided not to renew three of the company’s active contracts expiring during Q121. We noted that Corecivic also saw some contract non-renewals. Yet through it all, both Corecivic and Geo have been managing both their operations and their capital structures quite effectively.
On Geo’s Q4 2020 conference call, CFO Brian R. Evans stated those three contracts totaled $100mm of revenue, but clarified that not all of it will impact the company’s 2021 figures. Mr. Evans commented:
As I said, the BOP facilities that are expected to roll off this year is about $100 million in revenue between the three of them, but all of that revenue won’t impact this year. Some of the revenue that will impact is the facilities that have already been announced for termination plus these others that we expect to terminate, offset by the facilities that are coming online which are mainly the facilities in California and the US Marshals facility in Texas.
Geo appears to be beating its own guidance. On that Q420 conference call, Noble Capital Markets Inc. analyst Joe Gomes asked:
The first question I wanted to ask, you guys had a nice beat on adjusted basis for the guidance you provided in the third quarter, even in such a difficult operating environment. And I just wondered if you could expound a little bit more on how you guys ended up beating the third quarter guidance – the guidance made in the third quarter. Pardon me.
To which Mr. Evans replied:
Sure. So, I think two main issues, we’ve consistently during the pandemic perform better in a number of cost categories in the facilities. And we continue to see that during the fourth quarter. And going into next year, we’ve – we haven’t necessarily assumed that all that benefit will continue. So, we’ve been conservative with regards to that benefit that we’ve been able to experience and manage, and then we also saw some modest improvement in some of our occupancy levels at some of our facilities.” (emphasis added)
Geo has certainly been hurt by COVID. Inmate populations have declined amid pandemic lockdowns, and management has needed to implement costly sanitation and testing procedures to keep both employees and inmates safe amid the pandemic. Mr. Zoley pegged the overall COVID impact to Geo’s financial profitability at a “15% to 20% reduction.”
In response, Geo is prioritizing debt paydown and shoring up liquidity. On Geo’s conference call, CEO & Founder George Zoley announced that, over the course of 2020, Geo paid down approximately $100 million of net debt and cut quarterly dividend payments. It also raised new money. On February 17, 2021, Geo tapped the new issue debt markets with a private offering. Bloomberg covered the effort:
“Geo Group Inc., one of the largest operators of private prisons and immigrant detention centers in the U.S. that has been snubbed by much of Wall Street, is planning to sell at least $200 million of convertible bonds to refinance debt maturing next year.
The company has tapped StoneX Group Inc. to run the sale amid increasing political scrutiny over the for-profit prison industry, according to people with knowledge of the matter, who asked not to be identified because details of the transaction are private.
If successful, the deal will help Geo refinance its 5.875% unsecured notes due in January 2022, according to a statement Wednesday. It could also help alleviate concerns about the company’s ability to raise capital from institutional investors.
It appears there’s a bank for every deal. Bloomberg continues:
“The sale comes at a challenging time for Geo. Its earnings have been hit by lower occupancy rates at its facilities during the pandemic, while the entire industry remains under heavy political pressure. President Joe Biden instructed the Justice Department last month not to renew contracts with private-prison operators, dealing the latest blow to the sector.
The offering was a big hit. In its 2020 10-K, Geo announced that on February 24, 2021, Geo closed on “$230.0 million…of 6.50% exchangeable senior notes due 2026,” $30.0 million ahead of launch.
The ratings agencies, however, are unimpressed. S&P Global Ratings slapped a vicious two-notch downgrade on the company (and also downgraded CoreCivic for sh*ts and giggles). Per Bloomberg:
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.
Restructuring professionals are on the hunt for everything and anything these days. While the fundamentals clearly suggest there’s still room for these businesses to run, there’s some writing on the wall. And having nothing better to do, restructuring professionals are agitating and, consequently, they’re chatting up various lenders in the capital structure and now they, too, are agitating and, presumably, the company will need to engage with those lenders at some point. The downgrade all but nudges that scenario into action.
Geo’s capital structure is … robust. It looks something like this:
$704mm of 1L Revolving Credit Facility due 5/24;
$770mm of 1L Term Loan B due 3/24 (trading at roughly 88 cents);
$281mm of 5.125% ‘23 senior unsecured paper (trading at roughly 88 cents);
$242mm of 5.875% ‘24 senior unsecured paper;
$350mm of 6% ‘26 senior unsecured paper; and
the new $230mm of 6.5% ‘26 convertible notes (trading at 105).
Obviously, given the refi, Geo’s nearest-term maturing tranche, the 5.875% Senior Notes due January 2022, went out as effectively par paper. The longer dated 6% unsecured paper maturing in April 2026 has been a bit dicier, dipping down into the 60s back in November. Notably, however, it now trades higher now (~72) than it did on Election Day (though it is down 10% since the new year, which reflects President Biden’s directive regarding private US prison companies). The unsecured notes maturing in October 2024 follow the same pattern (and currently trade at ~79.5).
Like we said, these businesses aren’t going away tomorrow; they’re even raising fresh capital in the face of some notable headwinds. Despite peak negative headlines, it’s clear that market participants haven’t given up on private prisons. The pertinent question is whether that trend will persist as the negativity surrounding these names continues to grow and lenders up and down the stack coalesce in an attempt to engage the company on its still-over-levered balance sheet.