Moody's Cuts Corrections Corp. (CXW) to 'Ba1'; Outlook Lowered to Negative
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Moody's Investors Service downgraded the senior unsecured rating of Corrections Corporation of America (NYSE: CXW)(CCA) to Ba1 from Baa3, as a result of the August 18, 2016 announcement by the U.S. Justice Department plans to phase out its use of privately-operated prisons. The rating outlook was revised to negative from stable.
The following ratings were downgraded:
Corrections Corporation of America -- senior unsecured rating to Ba1, from Baa3, senior unsecured debt shelf to (P)Ba1, from (P)Baa3.
The rating actions and the negative outlook reflects the substantial uncertainty regarding the ultimate effect that the Department of Justice announcement will have on the REITs cash flows. Moody's notes that as of June 30, 2016 the federal bureau of prisons represented approximately 9% of the entity's revenues. However, the steep decline in the REIT's stock price has closed this capital market access at least in the short term.
Upward 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.
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 total occupancy losses of 10% or more and declining margins would also lead to downward rating pressure.
Moody's last rating action with respect to CCA was on June 11, 2015 when Moody's upgraded the senior unsecured rating of Corrections Corporation of America to Baa3 from Ba1. The rating outlook was stable.
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