OREANDA-NEWS. Fitch Ratings assigns a rating of 'BB+/RR4' to Corrections Corporation of America's (NYSE: CXW) proposed senior unsecured seven-year debt issuance of $250 million. The transaction is leverage neutral as proceeds from the bond issuance will be used to pay down the company's revolving credit facility. A full list of Fitch's current ratings for CXW follows at the end of this release.

KEY RATING DRIVERS
The rating reflects the company's strong credit metrics and liquidity offset by declining occupancy rates and contract losses and limited contingent liquidity from the company's portfolio of properties.

STRONG FINANCIAL METRICS
CXW's leverage is relatively low for traditional U.S. equity REITs but in-line with broader corporates at the same rating level. Leverage (as measured by net debt-to-recurring operating EBITDA) was 2.9x for the trailing 12 months (TTM) ended June 30, 2015, versus 2.9x and 3.0x for full years 2014 and 2013, respectively. The company targets leverage of 3.0x with a maximum level of 4.0x. Fitch projects that leverage will remain in the 3.0x range over the next few years as the company generates cash flows from newly signed contracts and in-process developments, offset by future development spending.

CXW also has a high fixed-charge coverage ratio (recurring operating EBITDA less recurring maintenance capital expenditures divided by cash interest incurred). Coverage, pro forma for the expected bond issuance, was 6.9x for the TTM ended June 30, 2015 versus 8.3x and 7.2x in full years 2014 and 2013, respectively. This metric is also relatively strong within U.S. equity REITs but in-line with broader corporates at the same rating level. Fitch expects coverage to remain in the low- to mid-7.0x range.

FALLING OCCUPANCIES
Average compensated occupancy was 84.9% for the quarter ended June 30, 2015, level with the same period the year prior but down from a high of 99% for the quarter ended June 30, 2007. Total occupancy excluding idled facilities was 92.3% as of June 30, 2015, down from 92.8% as of Dec. 31, 2014 and down further from 95% as of Dec. 31, 2013, indicative of asset utilization weakness.

While CXW desires a certain level of vacancy in order to meet demand, occupancy has fallen steadily over the past six years. This trend has been driven by the company increasing its total design capacity for available beds to 83,500 from 73,000 over the same time period coupled with contract losses which have resulted in idled facilities and over 6,000 beds of unused capacity. Despite falling occupancies, the company's revenue per compensated man-day continues to grow steadily at the same time it is maintaining or slightly increasing its operating margins, as the company incurs minimal costs on idled facilities.

SOLID COMPETITIVE POSITION
The long-term credit characteristics of the private correctional facilities industry are generally attractive, although there are potential headwinds. Public prisons are generally overcrowded and the supply of new prisons has been modest over the past five years. The private sector accounts for approximately 10% of the U.S. prison market and CXW is the market leader with 40% market share of all private prison beds. CXW's largest competitor, The GEO Group (GEO), controls approximately 34% of private prison beds, but relatively high barriers of entry exist for other potential competitors. Despite slight declines in prison populations since 2009, the U.S. private correctional facilities should continue to exhibit modest growth in the long run.

RELATIVELY STABLE CONTRACTUAL INCOME
CXW enters into contracts with federal agencies as well as state and local governments. A portion of these customers typically guarantee contracts either at a per-inmate-per-day (per diem) rate or utilize a 'take or pay' arrangement which guarantees minimum occupancy levels. Contracts with these government authorities are generally for three to five years with multiple renewal terms, but can be terminated at any time without cause. Terms are typically exposed to legislative bi-annual or annual appropriation of funds process. Since contracts are subject to appropriation of funds, strained budget situations at federal, state, and local levels could pressure negotiated rates.

The company received multiple requests for assistance with contracts from its government customers throughout the financial downturn. CXW was able to adjust cost and/or service items in contracts to compensate for reduced revenue levels such that the contracted profit and margins did not deteriorate. As a result, the company had strong relative financial performance through the recent recession. Despite several contract losses in recent years, the historical renewal rate at owned and managed facilities is approximately 93%.

LIMITED REAL ESTATE VALUE
CXW's real estate holdings provide only modest credit support. There are limited to no alternative uses of prisons and the properties are often in rural areas. The company has never obtained a mortgage on any of its owned properties, exhibiting limited contingent liquidity. However, the facilities do provide essential governmental services, so there is inherent value in the properties. Additionally, prisons have a long depreciable life of 50 years with a practical useful life of approximately 75 years. CXW has a young owned portfolio with a median age of approximately 19 years.

LIMITED SECURED DEBT MARKET
Due to the uncertain real estate value, the secured debt market for prisons remains undeveloped and is unlikely to become as deep as that for other commercial real estate asset classes, weakening the contingent liquidity provided by CXW's entirely unencumbered asset pool. Fitch would view increased interest for prison collateral from institutional secured lenders throughout business cycles as a positive credit characteristic. Despite limited secured debt access, Fitch expects that the company will retain strong access to capital through the bank, bond and equity markets to fund its business and address debt maturities.

CONCENTRATED BUT CREDITWORTHY CUSTOMER BASE
CXW's customer base is highly creditworthy, but slightly concentrated as evidenced by the top 10 tenants accounting for 86% of first-half 2015 (1H15) revenues. Three of the company's top tenants are large federal correctional and detention authorities, which collectively made up 50% of revenues for the six months ended June 30, 2015. The U.S. Immigration and Customs Enforcement accounted for 22% of revenue, the U.S. Marshals accounted for 16% of revenue, and the Bureau of Prisons accounted for 12% of revenue. California, Georgia and Tennessee are the three largest state customers and together accounted for 24% of 1H15 revenues. The risk of revenue loss from the California corrections realignment program has been partially mitigated by recent actions from the state including a new lease at the 2,560-bed California City Correctional Center, although California remains a focal point given it was 13% of company revenues in 1H15 and the recent decline in California out-of-state inmate population.

CONSERVATIVE FINANCIAL POLICIES
Management has stated a leverage target of between 3.0x and 4.0x. CXW maintains strong financial flexibility as it generates annualized AFFO before dividends of approximately $310 million. Approximately 75%-80% of AFFO has been used to support the dividend while the remaining 20%-25% will support prison construction, debt reduction or other corporate activities. The company's return on investment (ROI) hurdle rate is 13%-15% cash-on-cash, pre-tax EBITDA returns to all capital investments.

ADEQUATE LIQUIDITY COVERAGE
CXW's liquidity coverage, excluding the secured revolver, is 1.6x for the period July 1, 2015 to Dec. 31, 2016. Sources of liquidity include unrestricted cash and projected retained cash flows from operating activities after dividends. Uses of liquidity include development and other capital expenditures. Liquidity coverage is 3.7x pro forma for the bond offering when including the secured revolver as a liquidity source.

In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs for issuers with IDRs in the 'BB' category. The RR of '4' for CXW's senior unsecured debt supports a rating of 'BB+', the same as CXW's IDR, and reflects average recovery prospects in a distressed scenario.

The RR of '1' for CXW's secured credit facility supports a rating of 'BBB-', one notch above the IDR, and reflects outstanding recovery prospects. The secured credit facility is effectively senior to the unsecured bonds. CXW's accounts receivable are pledged as collateral. Accounts receivable were $230 million as of June 30, 2015. Equity in the company's domestic operating subsidiaries and 65% of international subsidiaries are also pledged as collateral. The long-term fixed assets are not pledged. As of June 30, 2015, leverage through the secured credit facility was approximately 1.3x based on the drawn amount, and 2.1x assuming the facility was fully drawn.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for CXW include:
--Lower revenue growth (1% - 1.5%) at the property level in 2015 and 2016 due to the effects of lost contracts in 2014;
--Development expenditures of $184 million through 2016 consisting of various contractual obligations, such as Trousdale and Otay Mesa, in addition to the obligations related to the South Texas Family Residential Center;
--Recurring capital expenditures of $81 million through 2016, consistent with prior periods;
--Ramp-up of South Texas Family Residential Center managed revenue in 2015 to 65% of occupancy and 100% by 2016;
--Modest net operating income (NOI) from Trousdale and Otay Mesa facilities in 2015, as development is completed.

RATING SENSITIVITIES
Considerations for an investment-grade IDR include:
--Increased privatization of the correctional facilities industry;
--An acceleration of market share gains and/or contract wins;
--Adherence to more conservative financial policies (2.0x leverage target; 4.0x minimum fixed charge coverage);
--Increased mortgage lending activity in the private prisons sector.

Considerations for downward pressure on the IDR/Outlook include:
--Fitch's projection of leverage sustaining above 3.5x coupled with continued fundamental business headwinds. Should operating fundamentals improve, indicating current operating weakness is more cyclical than secular in nature, leverage sustaining above 4.0x would be considered for downward pressure on the IDR or Outlook;
--Increased pressure on per diem rates from customers;
--Decreasing market share or profitable contract losses;
--Material political decisions negatively affecting the long-term dynamics of the private correctional facilities industry.

FULL LIST OF CURRENT RATINGS

Fitch currently rates CXW as follows:

--IDR 'BB+';
--$900 million secured revolving credit facility 'BBB-'/'RR1';
--Senior unsecured notes 'BB+'/'RR4'.

The Rating Outlook is Stable.