S&P Downgrades Corrections Corp. (CXW) to 'BB'; Places Ratings on CreditWatch Negative

August 19, 2016 3:43 PM EDT

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  • The U.S. Department of Justice (DOJ) has directed Federal Bureau of Prisons (BOP) officials to decline to renew or substantially reduce the scope of contracts with private prison operators in an effort to reduce--and ultimately end--the use of private prisons to house the federal prison population.
  • Although it appears the short-term negative impact will be moderate, we believe there is risk that other government agencies, including the United States Marshals Service (USMS), could consider similar plans to reduce use of private prison operators, such as U.S.-based Corrections Corp. of America (CCA).
  • We are lowering all of our ratings on CCA, including our corporate credit rating to 'BB' from 'BB+', and placing them all on CreditWatch with negative implications.
  • We expect to resolve the CreditWatch placement once we have more information on the DOJ's plan, the magnitude of its impact on CCA's credit profile over the next several years, and whether other government agencies could adopt similar measures given the DOJ's poor assessment of private prison operators.

S&P Global Ratings today lowering all of its ratings on Corrections Corp. of America (NYSE: CXW), including our corporate credit and senior unsecured debt ratings to 'BB' from 'BB+' and our senior secured debt ratings to 'BBB-' from 'BBB'. Subsequently, we placed all of our ratings on CreditWatch with negative implications.

"The downgrade reflects the DOJ's plan to reduce--and ultimately end--the use of private prisons to house the federal prison population," said S&P Global Ratings analyst Gerald Phelan. "As a result of the DOJ's action, we expect CCA's sales to decline as contracts come up for renewal. We also believe there is the risk that over time, inmates presently housed in CCA's facilities could be transferred to public prisons, especially if the national prison population declines in the future."

S&P Global Ratings will resolve the CreditWatch placement following our review of the DOJ's plan and its potential negative effect on CCA over the next several years, including the expected revenue loss at BOP and possibly USMS; the potential for CCA's costs to increase given the DOJ's opinion that privately operated prisons compare poorly to BOP prisons in terms of services, safety, and costs; and the risk that other government customers could consider similar plans given the negative publicity. We will also take into account CCA's ability to market prisons that are exposed to nonrenewal by one or more federal agencies to other government customers and prospective clients, its ability to preserve cash flow (including potentially by lowering nonessential costs and reducing capital expenditures), and the political environment in conjunction with the upcoming elections. It's possible we could lower our ratings on CCA by one or more notches, or affirm our ratings at the present level following our review.

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