Bad News for ICE: Private Detention Companies in Financial Collapse

Over the past two years, banks that previously loaned to GEO and CoreCivic have refused to further finance the industry, leading to junk ratings from Moody’s and S&P Global. More recently, horrible conditions in those facilities have led to massive outbreaks. And states and localities are increasingly phasing out private prisons altogether.

Banks Refuse To Work With CoreCivic & GEO

As Of 2019, Banks Providing 87% Of Existing Loans And Credit To CoreCivic And GEO Announced They Would Not Extend Or Provide New Financing. “According to a July report by public interest groups, the six major banks that have withdrawn from the industry represent an estimated $1.93 billion, or 72 percent of the total current financing available to private prison companies, CoreCivic and GEO Group. By August, two more banks — PNC and Barclays — said they would no longer finance the industry. Together, the eight banks account for 87 percent of the loans and credit available to these companies, according to a research update by the public interest groups.” [Washington Post, 10/3/19]

CoreCivic And GEO Group Assigned Junk Credit Ratings From Moody’s And S&P Global Due To Risk To Revenue Streams From Changes In Government Policy And To Public Scrutiny. “Moody’s and S&P Global have speculative grade, or junk, credit ratings on CoreCivic and GEO Group partly because their revenues are at risk to changes in government policy and public scrutiny of companies profiting from detention.” [Reuters, 3/5/19]

Private Detention Facilities & Failed COVID Response

Headline: Huffington Post: “The COVID-19 Crisis Is Exploding Inside ICE Detention Centers.” [Huffington Post, 7/15/20]

Headline: KQED: “’People Are Terrified’: SF Judge Orders COVID-19 Testing at ICE Facility.” [KQED, 8/7/20]

Headline: Reuters: “CoreCivic, Which Runs Otay Mesa Detention Center, Reports 500 COVID Positives.” [Reuters, 7/13/20]

Headline: Roll Call: “About 900 private ICE detention staff positive for COVID-19.” [Roll Call, 7/14/20]

On Quarterly Earnings Call, CoreCivic Announced Restructure And Debt Reduction Plan As A Result of Lagging Contracts

CoreCivic Announced It Was Restructuring To C Corp As Of 2021, Discontinuing Dividends To Focus On Debt Reduction Efforts. “CoreCivic, Inc. (NYSE:  CXW) (the Company) announced today that its Board of Directors has unanimously approved a plan to revoke its Real Estate Investment Trust (REIT) election and become a taxable C corporation, effective January 1, 2021.  The decision is the result of an evaluation of corporate structure and capital allocation alternatives announced on June 17, 2020. Additionally, the Board voted unanimously to discontinue the Company’s quarterly dividend and prioritize allocating the Company’s substantial free cash flow to debt reduction, with a target total leverage ratio of 2.25x to 2.75x, excluding project specific non-recourse debt.” [CoreCivic press release, 8/5/20]

CoreCivic Considering Sale Of Up To $150M In Real Estate Assets To Accelerate Debt Reduction. “Beyond the operating cash flow we generate from our business, we also plan to evaluate the sale of up to $150 million in net proceeds of lower yielding non-core real estate assets in our Properties segment, which would allow us to accelerate the implementation of our revised capital allocation strategy.” [CoreCivic press release, 8/5/20]

CoreCivic CEO: New Approach Will Allow Us To “Reduce Our Reliance On The Capital Markets.” ““CoreCivic will have much greater flexibility to allocate our substantial free cash flow in a manner that serves the best interests of our shareholders, our business, our government partners, and the people and communities we together serve,” said Damon T. Hininger, CoreCivic’s President and Chief Executive Officer.  “We believe our revised structure and strategy, combined with a resilient core business, will result in significantly more liquidity, a stronger balance sheet and lower cost of capital, which will enable us to reduce our reliance on the capital markets.’” [CoreCivic press release, 8/5/20]

CoreCivic Cited Decreased ICE Contract Utilization As Primary Driver For Its Quarterly Results. “Financial results in the second quarter of 2020, compared with the second quarter of 2019, decreased primarily because of lower utilization of our existing contracts with Immigration and Customs Enforcement, or ICE, and modest utilization declines across many of our state-level contracts due to the ongoing impact of COVID-19.” [CoreCivic press release, 8/5/20]

CoreCivic Reported Idling Two Facilities In Oklahoma And Ending Two Management Contracts In Tennessee. The four facilities had capacity for 4,476 beds between them. [CoreCivic press release, 8/5/20]

CoreCivic Reported Its Quarterly Net Income Was Down 54% Over 2019 To $22.2 Million. [CoreCivic press release, 8/5/20]

CoreCivic Currently Holds More Than $2.2 Billion In Long-Term Debt. [CoreCivic press release, 8/5/20]

CoreCivic Cited Closure Of Southern Border, COVID Impact On Criminal Justice System And State Budget Gaps As Ongoing Risks & Uncertainties. “Although we continue to perform well and generate significant cash flows, risks and uncertainties associated with COVID-19 remain. Operations in the Criminal Justice System have not yet normalized the southern border remains effectively closed in many state budgets will have significant holes to fill.” [CoreCivic earnings call, 8/6/20]

GEO Group Announced Restructuring on Quarterly Earnings Call, Blaming “Political Rhetoric”

GEO Group Announced It Would Be Reducing Quarterly Dividends To Focus On Debt Reduction, Cited “Political Rhetoric Based On The Mischaracterization Of Our Role” Impacting Its Access To Capital. According to GEO Group chairman and CEO George Zoley, ““We believe that our earnings and cash flows remain strong and our business is supported by long-term real estate assets and high-quality contracts entailing essential government services. We also recognize that political rhetoric based on the mischaracterization of our role as a government services provider has created concerns regarding our future access to capital. While we do not have any upcoming debt maturities until 2022, we have announced today an anticipated reduction to our future quarterly dividend payments in order to preserve capital and focus on paying down debt. Our anticipated new dividend payment will allow GEO to remain structured as a publicly traded REIT, thus providing continued value for our shareholders, while also focusing on debt repayment.” [GEO Group press release, 8/6/20]

GEO Group: “Political Rhetoric . . . Created Significant Volatility In Our Debt And Equity Markets, And Created Concerns Regarding Our Future Access To Capital.” “We recognize that even before the COVID-19 pandemic, heightened political rhetoric based on a mischaracterization of our role, as a government services provider, had created significant volatility in our debt and equity markets, and created concerns regarding our future access to capital.” [GEO Group earnings call, 8/6/20]

GEO Group Reported Its Net Income Was Down Over 2019 To $36.7M. [GEO Group press release, 8/6/20]

GEO Group Currently Holds More Than $2.4 Billion In Long-Term Debt. [GEO Group press release, 8/6/20]

GEO Group Predicted Lower Occupancy Rates In ICE & US Marshals Facilities Would Result In 9% Decline In Revenue Through 2020. “We expect a continuation of lower occupancy levels at our ICE Processing Centers and U.S. Marshals Service Facilities through the end of the year, resulting in an estimated revenue decline of approximately 9% for the full-year 2020.” [GEO Group press release, 8/6/20]

GEO Group Updated Financial Guidance Based On Losing $60M Annual Revenue As Federal Bureau Of Prisons Let Contract Expire For Georgia Prison Facility. “Additionally, the Federal Bureau of Prisons (“BOP”) has experienced a decline in overall federal prison populations in part as a result of the COVID-19 pandemic. Due to this decline in federal prison populations, the BOP has decided to not rebid the contract for our company-owned, 1,900-bed D. Ray James Correctional Facility in Georgia, which is set to expire on September 30, 2020. Our updated guidance reflects the expiration of this contract, which generated approximately $60 million in annualized revenues.” [GEO Group press release, 8/6/20]

GEO Group Considering Selling Off Properties To Further Debt Reduction Efforts. “During the third and fourth quarter, we will undertake our annual budgeting process and expect to identify cost savings opportunities at the corporate and facility levels. Additionally, we expect to identify company-owned facilities that can be sold to government agencies or to third-party individuals.” [GEO Group earnings call, 8/6/20]

GEO Confirmed That Almost All Of Its ICE & US Marshals Facilities Were Operating Below Minimum Occupancy Levels Guaranteed In Its Contracts: “Harvey Poppel: Well. So are you saying that for example, you have this minimum occupancy payment schedule? Are all the facilities where you have minimum occupancy payments are you at those minimums or there some, where you haven’t gotten down that low yet? George Zoley: It’s somewhere below the minimums. Harvey Poppel: Well, but you’re getting paid for the minimum? George Zoley: But we’re getting paid at the minimum. Harvey Poppel: Yes. But are there some, where you haven’t yet with the occupancy levels haven’t shrunk yet to where you are protected on the minimum? Brian Evans: No, the facilities where we have the occupancy levels, where that’s been an issue, as we mentioned earlier, as has been ICE and Marshals facilities and most of those facilities are at or below those occupancy levels. There are a few Marshals facilities that do not have minimum occupancy levels. But I think the population levels that those facilities are at or probably where we would expect them to continue to run. They sort of during the early stages of the pandemic, those populations came down. And I think for the most part, they’ve stabilized at that sort of level.” [GEO Group earnings call, 8/6/20]

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