The private prison company CoreCivic struggled Thursday to attract enough investors for the company’s plan to build then lease two new prisons to the Alabama Department of Corrections — due in part to investors’ hesitation toward financing prisons, according to a financial expert.
CoreCivic’s troubles, first reported by Debtwire, could mean the multi-million dollar project could ultimately have higher interest rates, which could end up costing the state more, explained Jason Appleson, a portfolio manager with PT Asset Management, speaking to APR on Friday.
Barclays Capital is underwriting financing for CoreCivic’s prison construction in Alabama and had originally sought a bond issue to raise $634 million for Government Real Estate Solutions of Alabama Holdings LLC, a CoreCivic-owned corporation.
Appleson explained that on Tuesday the deal was opened to investors to gauge interest, but that “they weren’t having much success.”
According to an investor presentation by CoreCivic, the deal originally sought $633 million in taxable private activity bonds, which are open to a limited number of institutional investors, and another $215 million in private placement bonds, open to individual investors and banks.
Appleson explained that when investor interest wasn’t substantial enough, the company began tweaking the deal, lowering the private activity bonds to $436 million and raising private placement bonds to more than $400 million.
“What they did yesterday, when they still couldn’t generate enough demand for the senior bonds, is they created a new 15-year tranche,” Appleson said.
According to CoreCivic’s document, the deal originally included 10-year, 20-year and 30-year maturity bonds, but Appleson said they added a 15-year maturity bond Thursday, hoping to generate more demand.
“But where they stood yesterday was, they were still having trouble generating enough demand for the nearly $200 million, 30-year tranche,” Appleson said.
The company’s troubles could be based on a number of things, Appleson said, including a limited pool of investors.
“And then on top of it, prisons are sort of a bad word these days,” Appleson said, noting that it’s always been a tough sector.
From the perspective of a credit analyst and portfolio manager, Appleson explained that it’s a straightforward deal, backed by the state of Alabama’s money, but some investors are leery of prisons.
“A lot of investors will simply say, we’re insurance companies. We don’t want to own prisons. We don’t want to have that taboo,” Appleson said.
“I think they’re gonna get it done,” Appleson said of finalizing the financing. “It’s gonna be slow. I think it’ll push certain investors into it. They might have to make the deal a little bit cheaper, which means increase the interest rates.”
Asked if that could result in Alabama paying more, Appleson said yes, but it’s unclear by how much. There are still many variables at play, and the company could continue to shift bonds around.
“In a market like today’s, it’s uncommon, because there’s so much demand for municipal bonds in general, Appleson said of CoreCivic’s troubles this week garnering enough interest.
Rep. Chris England, D-Tuscaloosa, has been critical of Gov. Kay Ivey’s prison plan, and told APR on Friday that the news of CoreCivic’s troubles is all the more reason the state should look closer at this deal before moving forward.
“You kind of want to reconsider where the plans are going if the costs are already moving in the wrong direction before a shovel hits the ground,” England said.
England and many other state legislators have expressed concern that they’ve been kept largely in the dark on Ivey’s prison construction plans, which grew in cost by $500 million from the time Ivey’s administration announced the plan to when Ivey signed two 30-year contracts with CoreCivic in February, ballooning to an estimated $3 billion. Once constructed, the prisons are to be operated by the Alabama Department of Corrections, with maintenance provided by CoreCivic.
Previous attempts by the state Legislature to pass legislation that would have allowed the state to borrow money to build its own prisons failed. Ivey’s decision to move forward with a build-lease plan circumvents the need for the state Legislature to approve the deal.
A third prison, to be located near AL-139 and County Road CR-2 in Bibb County, is to be built separately by a group called Alabama Prison Transformation Partners, made up of Star America, BL Harbert International, Butler-Cohen, Arrington Watkins Architects and Johnson Controls, Inc.
“At this point, it’s been more in their best interest to keep us in the dark, because as details continue to emerge It just continues to reveal how bad a deal this is,” England said.
England said the issues CoreCivic is having securing financing “is going to end up costing us millions and millions more dollars.”
England noted a portion of CoreCivic’s investor presentation that states that ADOC cannot “develop or otherwise occupy a different facility which would serve the same purpose of, or materially reduce their utilization of the facilities being built as part of this project.”
“Anytime the basis of the deal requires us to continue to incarcerate people to make sure that we can finance it, it’s a bad idea,” England said.
Kristi Simpson, interim spokeswoman for the Alabama Department of Corrections, referred APR to CoreCivic when asked Friday whether the department believes the problems this week could result in higher costs for the state.
“Pursuant to the lease agreements, CoreCivic is responsible for obtaining financing for this project – as such, these questions should be directed to CoreCivic’s team,” Simpson said.
CoreCivic spokesman Amanda Gilchrist in a response to APR on Friday didn’t answer whether the problems the company is having securing financing could result in more cost to the state but instead said the project is still on track.
“We’re on track to deliver the state of Alabama desperately needed, modern corrections infrastructure to replace its dilapidated, aging facilities that originally were designed with one purpose in mind – to warehouse individuals, not rehabilitate returning citizens,” Gilchrist said in a statement. “As 95 percent of incarcerated people will someday return to free society, it is in everyone’s best interests to provide safer, more secure correctional environments that accommodate rehabilitation and therefore contribute to reduced recidivism, thus making the state’s communities safer.”
The U.S. Department of Justice in December filed a federal lawsuit against the state of Alabama and the Alabama Department of Corrections, alleging violations of inmates’ constitutional rights to protection from prisoner-on-prisoner violence, sexual abuse and excessive force by prison guards.
In previously released reports, the Justice Department detailed systemic problems of abuse from guards, corruption, rampant drug use, violence, overcrowding and understaffing in Alabama’s prisons. The DOJ in those reports states that while new prison facilities might help in some areas, new buildings won’t fully address the state’s widespread, deadly problems in its prisons.
Barclays in 2019, joined with numerous other banks that cut ties with businesses that detain immigrants and run for-profit prisons. The company is drawing criticism from activists and investors over its decision to help CoreCivic finance Alabama’s prisons.
Numerous investors and activists signed a letter this week encouraging investors to steer clear of the deal.
“We strongly urge banks and investors to refuse to purchase securities that will be offered on April 15th whose purpose is to perpetuate mass incarceration,” the letter reads.
“The Alabama Department of Corrections has financially mismanaged operations for decades and, as such, has contributed to the ongoing violation of prisoners’ constitutional rights to be free from cruel and inhumane treatment,” the letter continues. “The bill for deferred facilities maintenance recently doubled to $1 billion over just a five-year period.”
The letter states that by purchasing bonds, investors will finance the construction of prisons by a private prison operator, which will then be managed by ADOC.
“Over the last several decades, ADOC has resisted constitutional mandates and demonstrated a gratuitous, wanton, and life-threatening disregard for the safety and well-being of prisoners,” the letter reads, which was signed by Rachel Gerrol, co-founder and CEO of NEXUS Global, and Julie Gorte, senior vice president for sustainable investing at Pax World Funds.