Private prison companies move to cut debt as activists hit home
Geo Group and CoreCivic to change structure as social pressure reduces access to capital markets
Geo Group and CoreCivic, the two largest publicly traded private prison operators in the US, are changing their structure to slash debt, as rising pressure from social activists cuts their ability to access capital markets.
CoreCivic said it will drop its real estate investment trust (Reit) status and become a taxable C corporation, a shift that comes with a higher tax bill but which will allow the company to cut its dividend and put more cash toward reducing debt. Geo Group will also lower its debt by curtailing its dividend. It is targeting a $100m reduction this year. Both companies are exploring asset sales.
Damon Hininger, chief executive of CoreCivic, said the company’s cost of capital had been increased by its “incorrect” characterisation as a “non-ESG investment”. Geo Group’s chief executive George Zoley also noted that “the current political rhetoric and mischaracterisation of our role as a government services provider has created concerns regarding our future access to capital.”
The changes come on the heels of announcements last year from several major banks, including JPMorgan Chase, Bank of America and Wells Fargo, that they would stop financing private prison companies, following a years-long public pressure campaign from divestment activists.
While private prison companies “still have access . . . ultimately, the question becomes, at what cost,” Joe Gomes, senior research analyst at Noble Capital Markets, said. “At a certain interest rate . . . the projects that you’re bidding on, it makes it difficult to make them economically viable.”
Both Geo Group and CoreCivic have seen their share prices plummet more than 40 per cent since the beginning of March, even as US stocks have largely recovered from the corona-induced market sell-off.
While the divestment campaign has been going on for years, private prison operators, which house 8.6 per cent of the country’s prison population, have come under additional scrutiny in the past two years over their treatment of asylum seekers in detention centres.
The industry has also suffered financial losses related to the pandemic, as a push to decrease prison populations for fear of coronavirus spikes has left beds empty.
Close to 90,000 inmates across the country have tested positive for the virus to date, according to data collected by the non-profit criminal justice newsroom The Marshall Project.
While both Geo Group and CoreCivic emphasised their Covid-19 action plans in Thursday’s calls, Geo Group is facing a shareholder lawsuit, filed last month after a report published by The Intercept, over allegations the company “blundered” the coronavirus response in one of its halfway houses and caused damage to its shareholders’ value.
Geo Group did not respond to a request for comment on the lawsuit.
On top of that, the protests over police violence and racial injustice this summer have put private prison operators on the radar as investors try to identify companies that are inhibiting the move toward a more racially just society, says Olga Emelianova, executive director on MSCI’s ESG research team.
Despite the controversies, it is rare for a divestment campaign to actually inflict financial harm on its target, says David Webber, a law professor at Boston University who wrote a book on pension divestment.
Throughout history, divestment campaigns, “in terms of the actual economic impact, . . . have often been underwhelming,” Mr Webber says.
Within the private prison industry, however, “there seems to be some of the strongest evidence I’ve seen to date that divestment campaigns . . . can actually work in that bottom-line sense of hurting the target economically, and not just raising attention.”