Private prison owners CoreCivic Inc. and GEO Group Inc. are facing a lender exodus amid the ongoing U.S. migrant crisis, but credit experts say neither company's operations is in imminent danger.
Rating agencies say the overall financial health of CoreCivic and GEO Group — the largest U.S. private prison companies and the only two public real estate investment trusts in the sector — remains intact after several big banks said they will cease financing their operations. Still, lenders' and investors' increased sensitivity to social issues could diminish the prison companies' resources and prove to be a weak point down the road.
Both companies, which own and operate prisons on behalf of various state and federal agencies, including U.S. Immigration and Customs Enforcement, have endured criticism for years from prison-reform advocates who argue against involving profit-seeking enterprise in the incarceration system. But the 2016 election of President Donald Trump, which reinvigorated the share prices of CoreCivic and GEO Group and linked the pair to the new administration's controversial border-enforcement policies and escalating migrant detention, intensified the backlash.
Activists have focused on pressuring lenders tied to the industry, with some success in recent months. On Aug. 13, PNC Financial Services Group Inc., citing its "commitment to environmental and social responsibility," became the latest large bank to say it will stop new financings for companies operating private prisons.
"Frankly, you've had a lot of real bellwether banks exit," said Fitch Ratings Senior Director Stephen Boyd, who described the prison REITs' devolving relationship with its lenders as unique among real estate companies.
The banks' retreat also applies to capital advisory work, and several firms that had retained sell-side analysts to study the already thinly covered prison industry recently dropped coverage. There was no question-and-answer segment on CoreCivic's recent second quarter earnings call.
Of the 10 banks participating in CoreCivic's credit facility, five — JPMorgan Chase & Co., Bank of America Corp., SunTrust Banks Inc., Fifth Third Bank and PNC — have now publicly renounced their support for the private prison business. Together, the banks account for 66% of the $1 billion that lenders originally committed to the facility.
"While these companies are not a material portion of Fifth Third's business, we have decided not to provide future financing to this segment," Fifth Third, a Cincinnati-based lender, said in a July statement. "We will honor the existing credit and loan commitments currently on our books, but we do not intend to enter any new financing arrangements with these companies."
The other banks participating in CoreCivic's credit facility are Citizens Bank NA, Regions Bank, Pinnacle Financial Partners Inc., First Tennessee Bank NA and Synovus Financial Corp.
"The private sector is attempting to respond to public policy and government needs and demands in the absence of long standing and widely recognized reforms needed in criminal justice and immigration policies," a Bank of America spokesperson said in an email. "Lacking further legal and policy clarity, and in recognition of the concerns of our employees and stakeholders in the communities we serve, it is our intention to exit these relationships."
A public relations liability
Spokesmen for both CoreCivic and GEO Group said activists targeting the companies and their banking relationships are misguided and driven by a "false narrative." The facilities provide adequate care and resources and are not overcrowded, and they have never housed unaccompanied minors, they said.
"It's unfortunate that misleading political activism has been allowed to impact decade-long banking relationships," the GEO Group spokesman said.
For now, the banks' retreat represents mostly an investor and public relations liability for CoreCivic and GEO Group, as both have years to line up other lenders. GEO Group in June extended its senior revolving credit facility maturity date to 2024, and CoreCivic's revolver does not mature until 2023. Participant banks typically have a tenure of at least five years and do not move to "amend and extend" until about a year from maturity.
Cameron Hopewell, managing director for investor relations at CoreCivic, said all but one of the banks participating in the company's credit facility have vowed to honor their commitments, and some participant regional banks have even signaled a desire to increase theirs. Communication lines with Bank of America and JPMorgan Chase, meanwhile, remain open, and Hopewell described CoreCivic's relationship with the pair as still "constructive."
"And we've talked with a number of other U.S.-based banks as well as international banks — Canadian and European banks predominantly — and [we] feel like we'll have plenty of interest for a credit facility years down the road when an update is needed," Hopewell said.
Other financing options
Hopewell said CoreCivic has "myriad" other effective financing options, including private placements and mortgage financing on its largely unencumbered asset base.
However, Fitch Ratings' Boyd said prison REITs like CoreCivic face an incrementally more difficult fundraising environment. Unlike other property sectors, prison landlords have more difficulty securing asset-level mortgage capital, in part because prisons are not versatile real estate assets that are easily adaptable for reuse. Further,
Fitch downgraded CoreCivic's issuer default rating in July to BB from BB+, in a move that could affect the company's debt pricing. The rating agency also lowered the company's ratings outlook to "negative" from "stable," which Boyd said reflects a wait-and-see attitude about the company's ability to enlist new lenders. Fitch does not rate GEO Group.
Boyd noted that a rising number of banks and equity investors have committees to weigh environmental, social and governance issues. "Companies increasingly are being pushed by their employees, their investors or both," he said.
Tatiana Kleiman, analyst at S&P Global Ratings, said she expects both companies' lender groups to shift to smaller banks that are less prominent targets for public policy groups intent on disrupting the private prison industry.
"We're not concerned about the actual operations of the business," Kleiman said in an interview, adding that the prison REITs "actually have performed pretty well, given the tougher immigration policies and increasing border crossings."
"Financially," she said, "they're doing just fine."
S&P Global Ratings has a "stable" outlook on both GEO Group and CoreCivic, but Kleiman framed the upcoming 2020 presidential election as a "fluid situation" and something of a wild card for the industry.
"We do have an upcoming election that does introduce an element of uncertainty into the mix, and that's something that we're going to be thinking about," she said.