GEO - GEO Group's Debt Restructuring Makes 10% Yielding Bonds Attractive

Summary

• GEO Group is a recently converted C Corp that invests in correctional facilities.
• The company completed an extensive debt restructuring this year.
• Based on operating results and the impact of the private prison executive order, I believe the company's fixed income is a good investment.

GEO Group ( GEO ) is a corporation whose primary holdings are correctional facilities across the United States. The company used to be traded as a REIT but switched to a C Corp last year. The company has experienced political risk associated with its prisons being privately (versus publicly) owned. Additionally, the company has gone through a debt exchange which allowed it to defer the maturities of its bonds to later years. Currently, the company’s long-term debt is trading at just over 10% to maturity.

GEO Group’s income statement showed improvement in 2022. Year to date, the company increased its revenue by $56 million, and with slightly declining operating expenses, the company’s operating income increased by $62 million. While interest expenses did increase this year, the company is clearly generating the operating income necessary to cover its debt costs.

GEO’s balance sheet shows sizeable changes in 2022. While the company’s real estate remains little changed, GEO dedicated a large chunk of cash towards the reduction of long-term debt. The company’s book value also increased by $130 million in nine months. GEO Group’s balance sheet is far more deleveraged and well capitalized than it was a year ago.

GEO’s operating cash flow also increased by $30 million compared to the same period last year. The company’s free cash flow (operating cash flow less capital expenditures) stayed steady at $230-$240 million. GEO Group used its free cash and cash on hand to reduce its debt by more than $600 million during 2022. The debt reduction was a part of the debt exchange GEO conducted in 2022 to defer maturity dates.

One principal risk that GEO has faced over the last two is the federal Executive Order in 2021 which discontinues Department of Justice contracts with privately owned prisons. According to the company’s disclosure, the end of those contracts in 2023 would reduce revenue by 6%. Using the 2022 financial data, that would equate to $105 million. Even with that reduction in revenue, GEO would still generate positive free cash flows.

The company also has 11 idle facilities that it can repurpose for additional revenue in future years. According to the company’s disclosure, there was currently no need to impair these assets.

Another advantage to investing in GEO Group’s debt is the length of time prior to the next round of major maturities. The company has a small maturity due in 2024 that it could cover in its current cash, but after that, it does not need to deal with a majority maturity until its $110 million in notes come due in 2026. All, but the company’s $220 million in 2026 exchangeable notes were a result of the debt exchange this year.

It does not appear that GEO Group will need to take on additional debt over the next year, but the company does have $125 million in borrowing capacity under its revolving line of credit. This could be used to fund the remaining balance of its 2026 maturing notes should it find itself locked out from the credit markets.

It is important to note that the company does face some political risk at the state level. GEO has filed a lawsuit in California fighting state level legislation banning the use of private prisons. GEO Group’s use of a debt exchange and cash on hand helped it get out of a debt maturity wall that the credit markets would have been unlikely to address. The company’s free cash flow and ability to navigate the federal Executive Order should make investing in the company’s long-term debt successful.

CUSIP: 36162JAD8

Price: 96.69

Coupon: 9.5%

Maturity Date: 12/31/2028

Yield to Maturity: 10.256%

Moody's Credit Rating: B3

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