Why S&P Still Sees Private Prisons as Risky

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DALLAS – The private prison sector remains risky despite the Trump Administration's reversal of President Obama's limitations on the use of private lockups, according to S&P Global Ratings.

Attorney General Jeff Sessions issued a memorandum Thursday reversing the Obama administration's policy, which was to reduce use of privately operated, for-profit prisons with a goal of ending their use entirely. In August, then-Deputy Attorney General Sally Yates directed the Federal Bureau of Prisons not to renew contracts with private prisons.

Sessions countered that Yates' August order "impaired the Bureau's ability to meet the future needs of the federal correctional system."

The bureau has contracts with 12 private facilities, housing only about 21,000 of the nearly 190,000 inmates in federal prisons, according to Justice Department reports.

After Yates' action, outlooks on bonds for private prisons shifted to negative. Ratings for many of the facilities are below investment grade.

S&P said that Sessions' reversal immediately affects only two of its rated credits in Texas: the Reeves County Law Enforcement Center and the Garza County Public Facility Corp., both rated B-plus with negative outlooks.

"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 report Monday.

Most of the bond-financed private detention centers in the South and Southwest are built to hold immigration detainees. While former Homeland Security Secretary Jeh Johnson wanted to reduce the use of those facilities as well, that move has also reversed.

President Trump has signed an executive order calling for expansion of immigrant detention facilities and authorized the use of private contractors. Trump's Jan 25 order directs the Homeland Security Secretary to "take all appropriate action and allocate all legally available resources to immediately construct, operate, control, or establish contracts to construct, operate, or control facilities to detain aliens at or near the land border with Mexico."

S&P sees the administration's move as favorable for all of the private detention centers, including those used to hold immigration detainees.

"Whereas BOP has capacity in other Department of Justice-owned prisons, the ICE and USMS facilities do not appear to have competing government-owned facilities," Boatright noted. "This distinction has been meaningful in our credit considerations."

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