OREANDA-NEWS. Fitch Ratings has affirmed all the ratings for Corrections Corporation of America (NYSE: CXW) and has assigned a new 'BBB-'/'RR1' rating to CXW's secured term loan. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The 'BB+' Issuer-Default Rating (IDR) incorporates CXW's strong credit metrics offset by steadily declining occupancy rates and weakening margins. CXW's revenues remain highly reliant on short term 3 - 5 year contracts with federal and state government entities that have the ability to dissolve agreements with CXW at any time without cause, as well as funding for contractual payments often dependent on annual budget approvals with political under currents.

STRONG FINANCIAL METRICS

CXW has leverage that is low relative to Fitch's rated U.S. REIT universe, but in-line with broader corporates at the same rating level. Leverage (as measured by net debt to recurring operating EBITDA) was at an elevated 3.5x for the year-ended Dec. 31, 2015 as a result of the timing effects from CXW's acquisition of Avalon Correctional Services (Avalon) near the end of the calendar year. CXW incurred debt and other costs related to financing the Avalon acquisition, including an incremental $100 million term loan, while receiving minimal earnings benefit in 2015. Fitch expects CXW's leverage to return to the high-2x - low-3x range by the end of 2016 based on a full year of earnings from Avalon, the additional revenue from the contract awarded to its Red Rock facility, and its newly developed Trousdale facility coming on-line during the year. The company targets leverage between 3x - 4x.

CXW also has a high level of fixed-charge coverage. Coverage was 7.7x for the year-ended Dec. 31, 2015 versus 8.3x and 7.5x in 2014 and 2013, respectively. This metric is also amongst the strongest in Fitch's rated U.S. REIT universe. Fitch defines coverage as recurring operating EBITDA less recurring maintenance capital expenditures divided by cash interest incurred. Fitch projects that coverage will remain strong through the rating horizon.

FALLING OCCUPANCIES
Average compensated occupancy has declined every year since 2007 from 98.2%, and stood at 82.5% for the year-ended Dec. 31, 2015. While CXW desires a certain level of vacancy in order to meet demand, occupancy has remained well below its target range of available beds. CXW has lost multiple contracts in the last several years, some by choice as they relate to the company's lower-margin, higher-occupancy managed-only facilities. The company has been unable to recoup the losses in occupancy through acquisitions or new contracts. Margins have also suffered, dipping below 28% in 2015 after remaining approximately at 30% since 2007. The decline in California inmate populations has also negatively affected the company's operational metrics. However, CXW has consistently grown revenues per man-day with recent increases due to its high earning South Texas Family Residential Center. Fitch expects that falling occupancies and margins will be offset by limited development revenues and good cash retention after dividends, which should result in leverage sustaining in the high-2x - low-3x range over the longer term.

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 public 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 42% market share of all private prison beds. CXW's largest competitor, The GEO Group (GEO), controls 37% of private prison beds, but relatively high barriers of entry exist for other potential competitors. U.S. private correctional facilities should continue to exhibit modest growth in the long-run despite slight declines in federal prison populations in two consecutive years for the first time in over 40 years.

RELATIVELY STABLE CONTRACTUAL INCOME

CXW enters into contracts with federal agencies as well as state and local governments. 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 3 - 5 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 95%.

LIMITED REAL ESTATE VALUE

CXW's real estate holdings provide limited 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 a lack of 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 18 years.

LIMITED SECURED DEBT MARKET

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 institutional interest in secured lending for prisons throughout business cycles as a positive credit characteristic. Fitch expects that the company will retain strong access to capital through the bank, bond and equity markets.

CONCENTRATED, BUT CREDIT WORTHY CUSTOMER BASE

CXW's customer base is highly credit worthy, but concentrated as evidenced by the top 10 tenants accounting for 85% of total revenues in 2015. Three of the company's top tenants are large federal correctional and detention authorities, which collectively made up 51% of revenues for the year-ended Dec. 31, 2015. U.S. Immigration and Customs Enforcement accounted for 24%, up significantly from the prior year due to the South Texas Family Residential Center, the United States Marshals accounted for 16% of revenue, and the Bureau of Prisons accounted for 11% of revenue. California, Georgia and Tennessee are the three largest state customers and together accounted for 22% of 2015 revenue.

CONSERVATIVE FINANCIAL POLICIES

Management has stated a leverage target of approximately 3x, with a cap at 4x. CXW maintains strong financial flexibility as it generates annualized AFFO before dividends of approximately $309 million. Approximately 80% of AFFO has been used to support the dividend while the remaining 20% has supported prison construction, debt reduction and other corporate activities. The company's ROI hurdle rate is 13% - 15% cash-on-cash, pre-tax EBITDA returns to all capital investments.

SUFFICIENT LIQUIDITY COVERAGE

CXW's liquidity coverage is 4.8x for the period Jan. 1, 2016 to Dec. 31, 2017. Sources of liquidity include unrestricted cash, availability under the company's secured credit facility and projected retained cash flows from operating activities after dividends. Uses of liquidity include development and other capital expenditures. CXW benefits from having only $15 million in debt maturity payments related to its incremental term loan through 2017.

SECURED CREDIT FACILITY, TERM LOAN AND SENIOR NOTES NOTCHING

Fitch has affirmed the secured credit facility and assigned a new rating to the secured term loan at 'BBB-/RR1', one notch above the IDR. The secured credit facility and term loan are effectively senior to the unsecured bonds with CXW's accounts receivables pledged as collateral. Accounts receivables were $234 million as of Dec. 31, 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.

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 $234 million as of Dec. 31, 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 Dec. 31, 2015, leverage through the secured credit facility was approximately 1.1x based on the drawn amount, and 2.2x assuming the facility was fully drawn.

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.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--1.5% same-store NOI growth annually 2016 - 2018;
--No debt or equity issued through the forecast period;
--$53 million cash adjustment for depreciation and interest expenses in 2016 related to South Texas Family Residential Center, $49 million in 2017, and $34 million in 2018;
--$58.5 million in annual maintenance and technology capital expenditures from 2016 - 2018;
--$32.5 million in development expenditures related to Red Rock Correctional Center expansion in 2016;
--Dividends of $0.54/share in 2016, $0.56/share in 2017, and $0.58/share in 2018.

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 (2x leverage target; 4x minimum fixed charge coverage);
--Increased mortgage lending activity in the private prison 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 RATING ACTIONS

Fitch takes the following actions:

Corrections Corporation of America
--Issuer Default Rating (IDR) affirmed at 'BB+';
--Secured revolving credit facility affirmed at 'BBB-'/'RR1';
--Secured term loan rated 'BBB-'/'RR1';
--Senior unsecured notes affirmed at 'BB+'/'RR4'.