S&P Upgrades GEO Group (GEO) to 'BB-'; Expected to Sustain Robust FCF Levels

Standard & Poor's Ratings Services raised its corporate credit rating on private prison and detention facility operator and specialty REIT GEO Group (NYSE: GEO) to 'BB-' from 'B+'. The outlook is stable.

At the same time, we raised our rating on the company's senior secured debt to 'BB+' (two notches above the corporate credit rating) from 'BB'. The recovery rating of '1', indicating that lenders could expect very high (90%-100%) recovery in the event of payment default or bankruptcy, remains unchanged.

In addition, we raised our rating on the company's senior unsecured debt to 'BB-' (the same level as the corporate credit rating) from 'B+'. The recovery rating of '4', indicating that lenders could expect average (30%-50%) recovery in the event of payment default or bankruptcy, remains unchanged.

"The upgrade reflects our view that the company will not sustain a more aggressive financial profile over the next two-three years, and that it will continue to generate sufficient, stable free cash flow to fund shareholder dividends and contract-supported capital projects, such as the new 1,000 bed Ravenhall, Australia facility," said Standard & Poor's credit analyst Rodney Olivero. "Also, we do not believe the company will engage in speculative building projects as we do not believe U.S. federal, state, and local governments' use of private prison operators will rise above 10% of the total U.S. prison population over the next two-three years."

The stable outlook reflects Standard & Poor's view that GEO's credit ratios will likely remain near current levels. We believe the company can sustain its current level of operating performance; however, it is unlikely that federal and state governments will increase their use of private facilities to manage inmate populations in the near-term. This leads us to expect organic growth and the probability of speculative building to remain low. We also believe debt reduction will remain limited, given expected shareholder distributions.

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