Moody's Downgrades GEO Group (GEO) to 'B1'; Outlook Revised to Negative

August 19, 2016 10:08 AM EDT

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Moody's Investors Service downgraded the senior unsecured rating of GEO Group, Inc. (NYSE: GEO) to B1 from Ba3, 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:

GEO Group, Inc. - senior unsecured rating to B1, from Ba3; senior unsecured debt shelf to (P)B1, from (P)Ba3; senior secured credit facility to Ba3, from Ba2; corporate family rating to B1, from Ba3


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 REIT's cash flows. Moody's notes that as of December 31, 2015 the Federal Bureau of Prisons represented approximately 14% 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 GEO was on September 15, 2014 when Moody's assigned a (P)Ba3 rating to GEO Group's senior unsecured shelf. The rating outlook was stable.

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