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Rating Action: Moody's assigns A3 rating to Government Real Estate Solutions of Alabama Holdings LLC's $840 million senior secured bonds; outlook stableGlobal Credit Research - 09 Apr 2021New York, April 09, 2021 -- Moody's Investors Service, ("Moody's") today assigned an A3 initial rating to approximately $840 million of fixed-rate, fully amortizing senior secured bonds issued by the Public Finance Authority, the conduit issuer, with the bond proceeds loaned to Government Real Estate Solutions of Alabama Holdings LLC ("Borrower" or "Project Co"). The outlook is stable.Borrower will use the funds along with a cash equity contribution to finance the obligations of the Lessors (defined below) under two long-term Lease Agreements with the Alabama Department of Corrections ("Lessee" or "ADOC"), a department of the State of Alabama (Aa1 stable), to design, build, finance and maintain two correctional housing facilities with an aggregate 7,058 beds, and related medical and recreational facilities (the Project).Under the Lease Agreements, ADOC retains responsibility for the day-to-day operations of the facilities, including security and managing the inmates and employees. Maintenance and lifecycle services will be subcontracted to CoreCivic of Tennessee, LLC, a subsidiary of the Sponsor. When the project is substantially complete, ADOC will make monthly lease payments to the Lessors over a 30-year term to cover maintenance and rehabilitation costs, debt service and equity returns. The lease payments are subject to deductions for unavailability events and service failures.Rating RationaleThe A3 rating reflects the Project's relatively standard contractual framework and project structure for an availability payment public-private partnership (PPP) in the US, yet the highly supportive termination regime with full debt repayment in all scenarios is better than standard. The rating acknowledges the Project's essentiality in the state's effort to reduce prison overcrowding, comply with US constitutional (Eighth Amendment) requirements and remedy violations alleged by the US Department of Justice. At completion, the two prison facilities will represent about 40-50% of the state's rated bed capacity. The risks of political sensitivity, future consolidation of inmates away from the facilities or closure of the facilities are mitigated through the favorable termination payment regime, the Non-Substitution provision in the Lease Agreements and the essentiality of the assets. While essential, this is the first PPP in the state, so there is no experience administering PPP contracts over time nor timely meeting the agreed-to risk allocation.In construction, the rating reflects the ability for the manageable construction complexity to be completed on time and on budget by Caddell, an experienced Design-Builder ("DB") with an adequate schedule, price and security package to ensure the Project is completed. There are limited constraints owing to the two large and rural sites that require limited site preparation and underground works as there are no deep foundations nor deep excavation needed. The relatively simple low rise and predominantly single story buildings use significant off-site prefabricated elements, include repetitive designs and other aspects that improve construction efficiency. While the Project is significant in its size and includes over 50 buildings total, the individual buildings are straightforward and standardized with well-known construction techniques that have been utilized extensively by the DB that is headquartered in the state. The construction schedule is reasonable with several mitigation measures available to accelerate if delay occurs. The DB has adequate liquidity through the cash retainage of funds after financial close equal to its obligation to pay up to 12 months of delay liquidated damages, equal to a comfortable 25% schedule overrun. The Project will also favorably fund the six-month debt service reserve account (DSRA) in cash at financial close, which is better than the standard as well.The rating also incorporates the large size of the project compared to the size of the single DB, which has a relatively weaker credit profile and limited ability to absorb material cost overruns beyond the sound profit and contingency margin already incorporated in the base construction price. This is balanced by the strong 100% payment and performance bond that provides significant additional funding to replace the DB if needed. Despite the smaller size, the DB is based in Alabama and has good experience with commercial construction and knowledge of conditions locally, while the lead designer (DLR) and sponsor have a history of working together on similar projects in the US. CoreCivic has a good track record of developing corrections facilities in the US, while Caddell brings relevant local experience, including working relationships with key subcontractors and previous experience constructing prison facilities within close proximity of both project sites. The DB's price is considered reasonable given that 95% of the works are subcontracted and the DB intends to require performance bonding for all of its subcontractors as well as carrying contingencies related to cost escalation, labor availability and exposure to specialty trades.During the operating phase, Project Co has a limited scope of maintenance and rehabilitation obligations while ADOC retains all the medical and correctional facility specific operating services, which significantly reduces the occupancy period risk for Project Co. We expect the Project to perform with minimal deductions given CoreCivic's extensive experience managing similar assets in the sector. Additionally, deductions are limited such that minimum lease payments will be sufficient to pay debt service, insulating lenders from deductions. The rating incorporates the adequate financial metrics for an availability payment P3 with adequate debt service coverage ratios and sound all-cost breakeven ratios that provide sufficient resiliency for Project Co to absorb higher costs for maintenance and lifecycle services over the long 30-year operating period. The rating further incorporates the standard project finance features including limitations on business and additional debt; a low event of default DSCR covenant of 1.00x with limited equity cures; a collateral agent administered third party waterfall of accounts; a standard six-month DSRA and a three year look forward Major Maintenance Reserve account; and a typical 1.10x equity distribution test.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGRating OutlookThe stable outlook reflects our expectation that construction will proceed on time and on budget with limited delays and the transition into operations will be successfully managed as well.Factors that Could Lead to an UpgradeThe rating is unlikely to move up during construction. The rating may experience positive pressure once construction is complete and demonstrates a sustained record of meeting the maintenance performance standards with limited deductions while producing financial metrics in line with the base case forecast and while establishing a sound working relationship with the Lessee, ADOC.Factors that Could Lead to a DowngradeThe rating could face downward pressure if the project encounters meaningful delays or cost overruns during construction that cannot be passed through to the DB contractor or that put the project at risk of missing the longstop date; Lessee challenges the risk allocation in the Lease Agreements; or the transition to the operating phase encounters challenges resulting in weaker than forecast financial metrics. However, there cannot be performance related lease payments below levels required to pay debt service.Issuer ProfileCoreCivic, Inc. (Ba2 negative), the Sponsor, formed two wholly-owned special purpose entities, Government Real Estate Solutions of Central Alabama Holdings, LLC, ("GRESCA") and Government Real Estate Solutions of South Alabama Holdings, LLC, ("GRESSA" or GRESCA and GRESSA combined "Lessors"), to enter into two separate Lease Agreements with ADOC for the Project. Debt proceeds will be lent on to GRESCA and GRESSA pursuant to Inter-Company Loans with GRESA, which is the Borrower or Project Co.RATING METHODOLOGYThe principal methodology used in these ratings was Construction Risk in Privately Financed Public Infrastructure (PFI/PPP/P3) Projects published in July 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1169983. 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. Moses Kopmar Asst Vice President - Analyst Project Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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