It's either the best buy
around or the worse. I assume the fact the bank's gave
an extra $55mm means they feel pretty good about
getting their money back even in liquidation. Since the
bank facility represents 50% of their appraised asset
value they must feel this firm has $2billion in assets.
The unsecured debenture and the pref. represent
another $200mm on top.
The issue in buying the
unsecured bonds or the preferred are the resale of the
assets. Granted a number of the beds were really stepped
up but 50% more beds will have come on line at cost
so there is a less dilutive effect.
sum worth $1.4b roughly? If so then the unsecured
paper represents a good speculation. Since then the LOC
is/will be $1.1b, unsecured $250mm and $50mm for lawyers
For those interested, you all
might want to follow WHC's REIT Correctional Prop.
Trust. They are presently in the open market now selling
a youth prison(Jena) that WHC had problems with.
WHC needs the cash for new Fed contracts they
received so CPV will sell make room for a new Fed
facility. WHC's new 1,200 bed low security Rivers facility
is expected to cost $62mm or $52k per bed! Wall
Street for years has been using $35k for construction
costs per bed which seem low now.
Tell me if you
think this company has $1.4 billion in assets to cover
"At March 31, 2000, the Company
owned or was in the process of developing 52
estate properties, including 50 correctional and
detention facilities and two
corporate office buildings,
of which 46 properties were operating, three
under construction or expansion and three were in the
planning stages, with a
total aggregate cost of $2.2
billion. At March 31, 2000, CCA leased 37
from the Company, governmental agencies leased six
the Company, and private operators leased
three facilities from the Company"
January 2000, the Company completed construction at a
approximately $89.4 million of an 800-bed
medium-security prison in Salford,
England and entered into a
25-year lease with Agecroft Prison Management,
That's $112k per BED....
I think the banks have
figured it out, Wall Street has not as the they have
turned there head on these very attractive
Brendy is right to assume that an asset like a business
property is generally worth the cash flow it provides.
Motels generally use to sell for 3 times revenue, no
consideration for land unless it was a lot. The land and cost
of the building were be worth FAR less. I knew a
Prisons are different to an
extent. The only reason these are not full to brink is
stupid politics. These prisons could all be sold for a
good price in time. It makes common
from the balance sheet notes:
Prison Realty to effect an offering of securities by a
subsidiary of PZN backed by lease payments from the U K
government relating to a prison facility located in Salford,
England yielding net cash proceeds to Prison Realty of at
Least L45,000,000, on or before February 28, 2001
There is no way the government steps in if PZN
goes Ch 11. Ch 11 doesn't mean that operations cease,
it simply means that debt holders take a haircut and
equity holders get wiped out. PZN is a company with a
very viable business model, but the wrong capital
structure. There is no risk that anybody tries to liquidate
the company, since its worth much more as an ongoing
concern than in an asset sale. As such, there are no
public safety issues associated with a Ch 11 filing. The
US government is not in the business of bailing out
private investors, except in very limited situations
where they believe a higher purpose is served. The
banking crisis was far different, because a potential
collapse of the banking system had major implications for
the health of the entire economy. A banking collapse
can lead to a domino effect whereby the entire
financial system freezes up. A PZN bankruptcy filing is in
no way comparable.
Get out of this dog while
you can. Do the math -- a "reasonable" 7x cash flow
(EBITDA) multiple on $200 mm of EBITDA pro forma for the
combination of PZN/CCA, the new contract in California,
reasonable increases in occupancy, etc. Factor in a
mid-range estimate for payments required in relation to the
shareholder litigation ($100 mm? $200 mm?) and the equity in
this POS is worthless. For those who think I'm short,
get a grip. I would if I could, but I can't get a
locate to short this stock since it trades below $5 per
There really shouldn't be any need for the gov't
to step in. If PZN were to file BR, it would be
chapter 11, reorganization. In short, they'd get DIP
financing and continue to operate without interruption. I
believe such a scenario would result in zero return the
both the common and preferred shareholders.
unfortunate situation we now have is that despite the bad
press, the "operations" are doing OK. They are a bit
behind the 8-ball because they weren't able to fill the
beds as quickly as forecasted. The real problem is
that doc's antics over the past 18 months have
virtually destroyed the Balance Sheet.
been so many payments to banking groups, Blackstone,
Investment Bankers as well as increased effective interest
rates (see Brendy's post) that profitability (and more
importantly cash flow) is almost becoming
The best operation in the world will fail if you load
on enough fees and interest payments. PZN is on the
edge, I believe. But that's only a gut call. I stopped
looking at the actual numbers when I sold at year-end.
Although it may not be the responsibility of
govt, I believe it would step in and take over in a br
situation. There is too much risk to the public if security
fails due to understaffed prisons. It could be termed a
national emergency. During the banking crisis, I watched
the FDIC do things that were illegal in the name of
No, I don't believe that in a liquidation
scenario the proceeds from asset sales would even cover
the bank debt, much less the bonds or Preferred
stock. I think the bank feels the same way, otherwise
they would have forced PZN into bankruptcy and
proceeded with asset sales.
I think the bank made
the difficult decision that it was smarter to invest
more money into the enterprise in hopes that they
would survive. The prisons have value only to the
extent that they generate cash flow.
they be sold? A few might be, but the short answer is
that there simply is no market for used prisons that
probably are not built to the required Federal/State specs
and are scattered randomly throughout the US. It
would take years to dispose of the few prisons that
might ever be sold.
Yes, in theory there is
great demand for these prisons. But that same theory
should have resulted in PZN's prisons never falling
below 90% occupancy.
I believe the only rational
way to play the common or preferred is to assume that
six months from now they'll either be at zero value
or 3x their present value and invest
To buy the preferred instead of the common because
there might be something left over after
liquidation...I just can't get there.
Nice to have you battling back.
say might be true. The aftermarket for these prisons
is a thin one. But you forget the biggest value of
these is the zoning not just the building itself...I
hear this from the CPV people too.
(and unfinished assets) are listed at $2.2b....for PZN
to cover roughly ALL it's debts it needs it assets
to be sold 63% of there stated value and for many
prisons their construction cost. THe England and CA. City
prison recently finished were $200mm in construction
alone. A $1.4b asset coverage equals $28k a
You right, and bunch of old prison might not sell
easily. But I disagree with you their ONLY value is from
cash flow. If we were talking apartments, motels yes,
but Gov't's want these things and they know what it
cost and the effort to do this and Gov't don't care
about apartments. I feel these are truly special
situations. The prisons only have cash flow value to private
CPV is presently selling their Jena facility on the
open market according to their CC a week ago. THis was
set into motion after WHC recently won a Fed
contract. It will be interesting to see the price and the
buyer...it will give us an idea of the aftermarket. As I
mentioned WHC recent Fed prison is being build in N.C. at
Maybe I'm all wet, I have been before. But everyone
I've have ever talked to in the field(public or
private) feels these assets are not just throw-aways. But
as you say the fact is if they were worth so much
someone would buy the company for $350mm, add the debt
cost and you have a total cost of $1.75b or $35k a
bed...construction cost as stated by Wall Street.
firm must pay $25 for pf.a, but only if they have
the money -- that's why people are not willing to
step up to the plate. IMO, the rights offering will
flop without a sponsor like PL. In the absence of news
(Doc leaving is not news), I see this stock going back
to $2. Sorry, but the debt monster is just too big
without a heavyweight to get this company moving forward.
Slow liquidation seems to be the order of the day, and
the banks are first in line. Hope I'm wrong -- common
shareholders are always last in line.
Pref looks like it could be a better medium-term
buy right now than the common. Not hard to imagine
the pref at 12 (and up) in January after payment of
$1 in dividends, for a gain of 67%. 67% on the
common gets you to 4 5/8 (before any dividend).