Texas detention centers lose ratings after poor communication with Fed agencies

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S&P Global Ratings withdrew ratings from four privately operated detention centers in Texas, due in part to lack of response to requests for information from federal agencies.

Although ratings withdrawal does occur from time to time, the action is unusual when it is due to non-responses from the federal government. The information S&P sought involved immigration, which has been the top priority of the Donald Trump Administration.

“Overall, we have been able to communicate with ICE [Immigration and Customs Enforcement] regularly on the relevant federal policy questions,” said S&P spokesman Jeff Sexton. “Our ability to have ongoing and timely dialogue with BOP [Federal Bureau of Prisons] and USMS [U.S. Marshal’s Service] has been more limited.”

While S&P can obtain some of the information it needs online, “given the nature of the federal contracts, which have liberal termination provisions, keeping an ongoing dialogue with the agencies that maintain them is an important part of the process, especially given the variance in policy directives we have seen,” Sexton said.

Ratings were withdrawn on the Fannin County Public Facility Corp., rated BB with a negative outlook, Willacy County Public Facility Corp., rated BB-plus, negative, West Texas Detention Facilities Corp. in Hudspeth County, rated BB, negative, and Garza County Public Facilities Corp., rated B, negative.

“We base these rating actions on our inability to communicate with the federal agency that appropriates the funding, or the operator who manages a specific facility,” the analysts said. “And, to maintain a rating in this sector, we will need to speak with the federal agency that appropriates the funding at least annually, the operator who runs the facility at least quarterly, and the issuer that supports the transactions at least annually.”

Analysts “have made repeated attempts to have direct, regular communication with these federal entities and operators,” S&P said. “We have been able to speak with ICE and the operators but we have been unable to communicate with BOP and USMS, which have contracts with these local entities. Furthermore, given our unsuccessful outreach attempts we believe it is unlikely that any sort of meaningful dialogue will be forthcoming or be maintained on a regular basis.”

The Garza County facility with 2,063 beds is operated by Utah-based Managemet and Training Corp., which also operates the Willacy County Detention Center and an immigration center that was closed by riots.

The Willacy prison in Raymondville, Texas, sued MTC and sought a new operator after an inmate uprising damaged the $78.5 million bond-financed facility.

The Willacy County Local Government Corp., which issued $78.5 million of bonds in 2011 for the Willacy County Detention Center, was informed on in 2015 that the Federal Bureau of Prisons was cancelling its contract with MTC.

The Garza County lockup has not received a long-term contract with the Bureau of Prisons. President Barack Obama’s administration moved to end the Bureau of Prisons’ use of privately run prisons in 2016, but that policy was reversed with Donald Trump's election. Despite Trump’s advocacy for private prisons, the Garza County facility still has not obtained the 10-year contract it sought.

In 2018, the Florida-based Geo Group canceled its contract with Fannin County’s two facilities in Bonham, Texas, that housed 459 inmates, including federal prisoners. The county is seeking another operator.

Loss of the contract with Geo highlights the risk for bondholders of the facilities, some of which have been left vacant after operators departed.

The West Texas Detention Center in Sierra Blanca, Texas, is operated by Louisiana-based LaSalle Corp, a privately held business.

Moody's Investors Service downgraded Bowie and Polk counties' general obligation ratings in 2014 and 2015 after bonds for private detention centers went into default. The downgrades were attributed to revenue lost to the counties from the private facilities.

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.

The IRS has made a point of auditing tax-exempt debt issued for private prisons arguing that debt for lockups that house significant numbers amounts of federal inmates are taxable private-activity bonds.

In the town of Encinal near the Mexican border, a private operator known as Emerald Corp. labandoned a $23 million detention center that needed repairs 12 years after it opened. That forced LaSalle County, Texas, to take over the vacant facility, and negotiate a forbearance agreement to finance repairs as bonds issued by a conduit issuer went into default.

Investors in the LaSalle County Detention Center received 40 cents on the dollar for their bonds. In the meantime, county commissioners who served as the board of the public facility corporation had to find a way to staff the 680-bed lockup and seek inmates to support debt service.

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