DALLAS – President Donald Trump's plan to rely on private prisons to house federal inmates and immigration detainees is reviving interest in the high-yield bonds that financed the lockups.
"A federal return to utilization of private prisons and an acceleration of detainment activity by the Department of Homeland Security are producing more than market value improvements for municipal jail financings," said Matt Fabian, partner at Municipal Market Analytics.
Over the past two weeks, five bond financed private jail projects in Texas filed notices on the Municipal Securities Rulemaking Board's EMMA Web site showing a positive trend for the facilities, from the bondholders' perspective.
"In our opinion, this dynamic should accelerate the restructuring and/or re-launch of the 18 jail projects currently in the MMA database and reasonably reduce the number of new projects becoming impaired in at least the near term," Fabian said. "It may also spur new construction and financing of private jails, although these should tend to be taxable versus tax-exempt."
The restored policy, an affirmation of Trump's presidential campaign position, was announced in a February memorandum from Attorney General Jeff Sessions.
In addition to relying on existing facilities, Trump called for construction of new private detention centers near the Mexican border to hold inmates facing deportation. Trump also reversed President Obama's "catch and release" policy that allowed undocumented immigrants to remain in the community until their deportation hearing, creating more inmates for the private detention facilities that serve U.S. Immigration and Customs Enforcement.
While the new policy favors current investors and issuers of the debt, S&P Global Ratings cautions that the sector remains risky because the policy could once again reverse under another administration.
"Although S&P Global Ratings believes this most recent policy shift could further stabilize the sector for now, the Attorney General's memo also confirms our view that the potential for abrupt policy change will likely remain an inherent weakness for the sector in the long term," S&P analyst Kate Boatright wrote in a Feb. 27 report.
In the past decade, nine of 21 conduit issuers created by Texas counties to issue about $1.3 billion in municipal bonds for private detention centers have defaulted on their debt, according to disclosure notices and news reports.
But the recent
The Maverick County Public Finance Corporation near the Texas-Mexico border reported three offers to buy the closed facility after the White House announced the new policy.
The sale for $19 million is expected to close by this week and would nearly double the previous $10 million offer for bondholders holding nearly $37 million of outstanding debt.
Interest in the facility followed a Jan. 4 ICE memo asking detention center operators to report the total number of empty beds that could be ready for utilization in 120 days, according to the EMMA notice. The memo coincided with a Trump executive order launching aggressive new immigration policies.
In the West Texas county of Jones, the Midwest Public Facilities Corp. is
The trustee for the facility, U.S. Bank National Association is considering a $30 million offer.
In far South Texas, the Willacy County Local Government Corp. expects to close the sale within 45 days on a facility that has been vacant since Feb. 20, 2015 after inmates rioted and heavily damaged the lockup.
The corporation issued $78.5 million of taxable bonds in 2011 to defease a tax-exempt issue after the Internal Revenue Service disallowed the tax exemption.
The 2011 issue came in two tranches of $17 million with 7.375% coupons maturing in 2022 and yielding 8.25% and $61.5 million of 7.8% coupons maturing in 2028 with a yield of 8.5%.
According to the
Another immigration detention facility near the Texas-Mexico border is restructuring its debt after a default. The LaSalle County Detention Center's operator quit the contract on the lockup, leaving it unable to hold federal immigration detainees.
According to a disclosure notice
Bondholders in the LaSalle facility will receive 2% annual interest on outstanding principal and excess income will be split evenly between the bondholders and the county, per the agreement. All interest will be taxable going forward.
The county will retain $1 million to repair the facility's roof. The agreement applies to about $23 million of bonds issued in 2010.
In Limestone County in Central Texas, county-owned but privately-operated Limestone County Detention Center is back in operation three years after the 1,000-bed facility closed.
In July 2013 Management Training Corporation announced that it was closing the center and pulling out after U.S. Immigration and Customs Enforcement decided to stop sending undocumented immigrants to the center. Under an agreement with the county, MTC was supposed to have paid a minimum of $62,500 a month to rent the complex.
In 2016, LaSalle Southwest Corrections agreed to reopen the detention center after repairs were made. LaSalle also operates nearby McLennan County's Jack Harwell Detention Center, which handles not only federal prisoners, but also an overflow of inmates from the McLennan County Jail.
The Trump policy has been a boon for the private prison industry, which has seen its shares soar in the post-election stock market boom. The stocks of the two biggest private prison operators -- CoreCivic (formerly known as Corrections Corp. of America) and Geo Group -- have doubled since Trump's election.
According to ICE data, 46 of the 180 facilities that hold immigration detainees are privately operated. About 60% of ICE's 400,000 annual detainees are held in privately operated facilities.
Despite the brighter prospects under Trump, controversy continues to dog the private prisons. A 2014 lawsuit that attained class-action status this month claims that thousands of immigrants detained by U.S. Immigration and Customs Enforcement were forced to work for $1 day, or for nothing at all. The suit claims the inmates' labor violated federal anti-slavery laws.
One target of the lawsuit is the Denver Contract Detention Facility, a 1,500-bed lock-up in Aurora, Colo., a suburb of Denver. The Florida-based GEO Group operates the facility.
The lawsuit accuses GEO Group of violating Colorado's minimum wage laws by paying detainees $1 per day instead of the state's minimum wage of about $9 an hour. The company "unjustly enriched" itself through the cheap labor of detainees, the lawsuit says.
GEO said the inmates worked as volunteers and were not subject to the minimum wage laws.
"The volunteer work program at immigration facilities as well as the wage rates and standards associated with the program are set by the federal government," GEO spokesman Pablo E. Paez said in a prepared statement. "Our facilities adhere to these standards as well as strict contractual requirements and all standards set by ICE (U.S. Immigration and Customs Enforcement) and the agency employs several full-time, on-site contract monitors who have a physical presence at each of GEO's facilities."
In certifying the
"Many of the putative class members are immigrant detainees who lack English proficiency," Kane noted. "They have limited financial resources and reside in countries around the world. It is very likely that these claims would not be brought by individual detainees, especially considering the case's innovative nature."
