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GEO Group, Inc. -- Moody's downgrades GEO Group's corporate family rating to B2, outlook stable

Rating Action: Moody's downgrades GEO Group's corporate family rating to B2, outlook stableGlobal Credit Research - 24 Mar 2021New York, March 24, 2021 -- Moody's Investors Service, ("Moody's") downgraded GEO Group Inc.'s corporate family rating and senior unsecured debt rating to B2 from B1. Moody's also downgraded GEO's senior secured credit facility rating to B1 from Ba3. In the same rating action, Moody's assigned a speculative grade liquidity rating of SGL-3 to the company. The ratings outlook is stable.The rating actions reflect the potential risk of material revenue and earnings loss as federal agencies look to disassociate from private prison operators through the non-renewal of contracts upon expiration.Rating downgrades:Issuer: GEO Group, Inc.--Corporate family rating to B2 from B1--Senior unsecured debt to B2 from B1--Senior unsecured debt shelf to (P)B2 from (P)B1--Senior secured bank credit facility to B1 from Ba3Ratings assigned:Issuer: GEO Group, Inc.--Speculative grade liquidity rating at SGL-3 Outlook actions: Issuer: GEO Group, Inc. --Outlook stable RATINGS RATIONALE As of December 31, 2020 the Federal Bureau of Prisons (BOP), United States Marshals Service (USMS), and Immigration and Customs Enforcement (ICE) represented approximately 14%, 13% and 28% of GEO's revenues, respectively. It is expected that the private prison industry could transform itself to meet government needs by selling or leasing, rather than operating, some of its owned facilities, though the outcome of contract renewals across federal agencies and facilities and the ultimate effect on cash flows remain uncertain at this time.GEO's B2 corporate family rating reflects its adequate liquidity position, experienced management team and the credit strength of its government customers and tenants which are predominantly investment grade rated sovereign governments and U.S. states. The rating also reflects GEO's stable operating performance and solid credit profile for the rating category. These positive factors are offset by the company's high secured debt levels, lumpy debt maturity schedule and its operations in a niche business that is sensitive to government policy toward incarceration as well as the increasing disassociation from lenders and investors towards private prison operators, and therefore the future needs of the REIT's publicly funded clients and tenants. We regard the REIT's business sensitivities and headline risk as a social consideration under our ESG framework.The REIT's SGL-3 rating reflects an adequate liquidity profile over the next twelve month period. In late 2020, the company drew $250 million on its existing $900 million secured credit facility due in 2024 and reduced its quarterly cash dividend, to provide itself with ample cushion to meet funding needs over the medium-term. Additionally in February 2021, the company issued $230 million of 6.5% exchangeable private notes due 2026, using proceeds to redeem its outstanding $194 million of 5.875% senior notes due 2022. We note that this recent issuance proves successful access to funding, though with a higher cost of capital. Post issuance, the company has no maturities until April 2023 when $282 million of senior notes come due, however the REIT's liquidity position could weaken if access to and cost of capital remain challenged long-term. Furthermore, the company's near-term covenant cushion on its revolving credit facility could deteriorate from any shortfall in revenue and cash flows caused by future contract non-renewals. At year-end 2020, the REIT had approximately $284 million in cash on hand and $136 million in revolver availability. Despite concerns related to future access to financing, GEO maintains committed to allocating capital and excess cash flows to pay down debt in the current environment.The stable outlook reflects Moody's expectation that GEO is committed to maintaining leverage metrics over the longer term along with an adequate liquidity profile for the rating category.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSUpward rating movement will be unlikely in the medium term and will require more clarity on the full effect of this announcement to the REIT's cash flows. In addition, positive clarity on the disassociation from lenders and investors towards private prison operators may also lead to upward rating movement.Downward rating pressure would occur from continued adverse events, such as litigation or publicity related to private prison management and it's utilization by state and federal authorities, leading to a loss of market share in private prison ownership and management. Furthermore, contract non-renewals resulting in material revenue and occupancy declines would also lead to downward rating pressure.GEO Group, Inc. (NYSE: GEO) is a leading provider of government outsourced services focused on the management and ownership of correctional facilities, processing centers, reentry and residential community-based and youth services to Federal, State, and local governments in the United States, Australia, South Africa and the United Kingdom.The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Reed Valutas Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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