S&P Global revises GEO Group outlook to positive, raises unsecured debt rating
Investing.com -- S&P Global Ratings has revised its outlook on U.S.-based private prison operator, The GEO Group Inc., to positive from stable, and affirmed its 'B' issuer credit rating. The ratings agency has also raised its issue-level rating on the company's senior unsecured debt to 'B+' from 'B' due to the firm's debt prepayment in 2024 and expectations for improved recovery prospects for the unsecured lenders.
The revised outlook comes in light of the company's steady operating performance and debt repayment over the past year, which has kept its S&P Global Ratings-adjusted leverage below 4x. Notably, The GEO Group maintained leverage in the 3.7x-3.8x range throughout 2024, despite a decline in revenue from its high-margin electronic monitoring service segment. This was due to a decrease in participant counts.
While total revenue remained stable, the company's S&P Global Ratings-adjusted EBITDA margin contracted by about 200 basis points over the last 12 months. However, the firm's voluntary debt repayment and solid cash flow generation have reduced its net debt and enabled it to maintain leverage of below 4x.
S&P Global Ratings believes the company is well positioned to benefit from potential industry tailwinds associated with the Trump administration’s planned detention efforts. The agency anticipates that the new administration’s immigration policies could materially increase GEO's EBITDA generation and cash flow, although the timing and scale of these benefits are uncertain.
The GEO Group is favorably positioned in the private prison industry to benefit from a potential increase in demand from its largest customer, the U.S. Immigration and Customs Enforcement agency (ICE), which accounts for approximately 41% of its revenue. The company has about 10,000 beds in idle facilities and access to an additional 8,000 beds provided through existing contracts.
The company recently announced $70 million of investments to deliver expanded detention capacity, secure transportation, and electronic monitoring services to ICE. However, the government has not yet authorized additional funding for the detentions, and GEO’s credit metrics may temporarily weaken as it incurs start-up costs to ready its available capacity.
S&P Global expects the company will maintain S&P Global Ratings-adjusted leverage of less than 4x in 2025, with any material upside from the new administration's policies not anticipated until 2026. The agency forecasts GEO's leverage will remain steady at 3.5x over the next 12 months.
GEO has operated with a less-aggressive financial policy since its debt restructuring in 2022, though it will likely increase its shareholder returns over the next 12 months. The company has repaid over $90 million of debt year to date and is expected to continue to repay debt in 2025.
The GEO Group continues to face contract renewal and legal event risks. The company's ability to renew its federal electronic monitoring services contract, which accounts for 14% of fiscal-year 2023 revenue and expires in July 2025, is one of the key variables in S&P Global's forecast. Additionally, outstanding labor-related litigation in Washington, Colorado, and California could lead to large cash outflows for settlements or regulatory fines, which would increase the volatility of its credit metrics.
S&P Global could revise its outlook on GEO to stable over the next 12 months if it expects the company will increase its leverage above 4x and maintain it at that level. Conversely, the agency could raise its ratings on GEO if it sustains S&P Global Ratings-adjusted leverage of comfortably below 4x, FOCF to debt of more than 10%, and EBITDA interest coverage of at least 3x.
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