Federal Withdrawal Spurs Private Prison Bond Downgrades

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DALLAS – Bonds for three private prisons in Texas suffered downgrades well below junk-bond status after the U.S. Department of Justice announced plans to discontinue their use.

The bonds used to finance lockups in Garza, Reeves, and Willacy Counties were among eight issues under review by S&P Global Ratings before the DOJ letter.

The Justice Department's change in private prison policy was a major factors in the downgrades, announced late Friday.

"This policy shift has the potential to have a significant and near-term impact on the credit quality of the bonds due to the nature of the federal contract," said S&P Global Ratings credit analyst Kate Boatright.

Reeves County bonds issued for the largest detention center in West Texas fell six notches to B-plus from BBB-plus and retained a negative outlook.

Willacy County Local Government Corp. bonds used to build a now-vacant detention center in South Texas dropped to CC from CCC-plus. The federal Bureau of Prisons canceled its contract with the operators after an inmate uprising that left the facility uninhabitable.

The Garza County Public Facility Corp. was dropped to B-plus from BBB and also retained a negative outlook.

The prison bonds were already on review because S&P said that it had applied the incorrect criteria in rating the debt.

"In prior reviews, we incorrectly applied our "Special Tax Bonds" criteria, published June 13, 2007, to these bonds," the ratings agency wrote. "They should have been analyzed pursuant to our Human Service Providers criteria, published June 13, 2007."

The DOJ's Aug. 19 announcement affected only private prisons with contracts from the federal Bureau of Prisons.

Private detention centers that house undocumented immigrants have more than twice as many inmates.

Ten days after the DOJ announcement, director of Homeland Security Jeh Johnson said that his department, which includes U.S. Immigration and Customs Enforcement, was considering a similar move.

Johnson said he asked Judge William Webster, chair of the Homeland Security Advisory Council to report its findings by Nov. 30.

"I asked that the subcommittee consider all factors concerning ICE's detention policy and practice, including fiscal considerations," Johnson said in the Aug. 29 statement.

Johnson's announcement added further stress to high-yield bonds used to build dozens of detention facilities faced with falling inmate counts and growing competition.

Nine of 21 Texas counties that created conduit issuers for about $1.3 billion in municipal bonds for private detention centers have defaulted on their debt in Texas over the past decade, according to disclosure notices and news reports.

More immediately, federal Bureau of Prisons decision raises questions about whether private prisons with those contracts can make annual debt service payments, S&P's Boatright wrote.

In the case of Reeves County, "a contract cancellation, which would likely cause revenues to cease, we believe that the current reserves on hand could not cover debt service beyond the next year," Boatright wrote. "In that scenario, absent the identification of alternative revenue, we would likely lower our rating by more than two notches."

In Willacy County, "the downgrade reflects our view that the current shortfall of pledged revenues on these bonds could lead to a potential default by December 2017," Boatright said. "We expect a default on these bonds to be a virtual certainty based on a lack of revenues that will be available for payment on these bonds even under the most optimistic performance scenario over an extended period of time."

Of the 14 private prisons facing the loss of BOP contracts, five are in Texas -- the most of any state.

The contract cancellations will have a domino effect on the budgets of small towns and local communities that built the detention centers as a form of economic stimulus.

"We are very concerned about what is going to happen," Howard County Judge Kathryn Wiseman in Big Spring told the Houston Chronicle.

GEO Group employs 480 people at its detention facility there.

Wiseman fears that nearly all the jobs at the Big Spring prison will be lost when the company's federal contract expires in March.

The bureau had already announced that it would not renew its contract with CCA to operate the 1,200-bed Cibola County Correctional Center in Milan, N.M., which will close Oct. 1, costing 300 jobs.

Faced with loss of the BOP or Homeland Security contracts, public facility corporations, the alter egos of city councils and county commissioners courts that created them, would have to find some alternative use for the facilities. However, state governments are also reducing their inmate counts to reduce costs amid tight budgets, especially in the oil producing states.

The number of inmates housed by the Texas Department of Criminal Justice is down nearly 10,000 as a result of diversion programs launched several years ago.

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