Research: Rating Action: Moody’s downgrades GEO Group to Caa2, outlook stable

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New York, July 20, 2022 — Moody’s Investors Service (“Moody’s”) has downgraded GEO Group, Inc.’s ratings, including its corporate family rating and senior unsecured debt ratings to Caa2 from Caa1 and its senior secured credit facility to Caa1 from B3. The speculative grade liquidity rating was changed from SGL-3 to SGL-3. At the same time, the company’s rating outlook was revised from negative to stable.

The rating actions reflect the issuer’s execution of a distressed debt restructuring transaction with its credit facility lenders and bondholders to avoid probable eventual default under Moody’s definition, and should be closed in August 2022. The revised outlook to stable reflects the repositioning of the issuer’s capital structure, balance sheet and liquidity profile, through a reduction in net recourse debt and an extension of short-term maturities.

Degraded notes:

Issuer: GEO Group, Inc.

–Corporate family rating to Caa2 from Caa1

–Senior unsecured debt at Caa2 of Caa1

–Launch of senior unsecured debt to (P)Caa2 from (P)Caa1

–Senior secured bank credit facility at Caa1 from B3

Ratings have changed:

Issuer: GEO Group, Inc.

–Speculative liquidity rating from SGL-3 to SGL-4

Outlook Actions:

Issuer: GEO Group, Inc.

–Outlook revised to stable from negative

RATINGS RATIONALE

The downgrade of GEO’s corporate family and senior unsecured debt ratings to Caa2 reflects the company’s announcement of a full debt restructuring of its capital structure, which is considered by Moody’s as a distressed stock exchange, having the effect of helping to avoid a likely default. The proposed swap transaction will provide participants with a combination of cash and new debt at par as well as an enhanced collateral package. We note that non-participants in the Exchange Transaction will thereafter rank below the enhanced collateral package provided under the New Facilities and Notes.

The speculative liquidity rating upgrade from SGL-3 to SGL-4 reflects the issuer’s repositioned capital structure, balance sheet and liquidity profile. The proposed transaction, which extends maturities to 2027 and 2028, will give GEO additional time to further reduce its debt stock through free cash flow generated by the business, although longer-term growth prospects of the business model of private prisons remain unclear. Based on current covenants and minimum equity requirements, GEO’s revised debt maturities are expected to be approximately $170 million in 2023; about $430 million in 2024; approximately $340 million in 2026; around 900 to 960 million dollars in 2027; and about $440 million in 2028.

GEO’s governance risk is highly negative, reflecting its exposure to refinancing risk as lenders and investors diverge from the industry as well as substandard corporate governance practices compared to peers and as evidenced by the Proposed Distressed Debt Swap Transaction. These risks are partially offset by a commitment to allocate excess capital and cash flow to repay debt and reduce longer-term indebtedness.

We note that GEO continues to maintain stable operating performance and an adequate financial credit profile for the rating category despite broader ESG and liquidity concerns related to corporate governance, rollover risk and cost of capital. Additionally, the company remains on track to meet its previously articulated goal of $100-150 million in proceeds from asset sales. We expect the company to continue to opportunistically sell assets that are either underutilized or realize a premium to the initial investment.

The stable outlook reflects Moody’s expectation that GEO will continue to reduce long-term debt and maintain sufficient liquidity to meet contractual debt obligations in a challenging operating environment for private prison operators.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

An improvement in GEO’s ratings, which is unlikely in the medium term, would require a significant improvement in the long-term outlook for private prisons, including better access to capital and demonstration of positive revenue and earnings growth, on a lasting basis.

A downgrade in GEO’s ratings could occur if the issuer defaults on its debt obligations, or if expectations of collection of its debt instruments weaken further. Increased exposure to adverse regulatory events could also result in downward pressure on ratings.

The primary methodology used in these ratings was the Methodology for REITs and Other Commercial Real Estate Companies published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/74168. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

GEO Group, Inc. (NYSE:GEO) is a leading provider of outsourced government services focused on the management and ownership of correctional facilities, treatment, rehabilitation and community residential services and for youth in federal, state and local governments in the United States, Australia, South Africa and the United Kingdom.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following information, if applicable to the jurisdiction: Ancillary services, Information to be provided to the rated entity, Information to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the announced credit rating metric(s) described above.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Reed Values
Analyst
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Philippe Kibel
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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