Wed 01/19/2022 11:13 AM
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Relevant Document:
8-K (Includes Cleansing Materials)

On Jan. 6, The GEO Group disclosed that beginning in November 2021, it engaged in confidential discussions concerning a potential refinancing, exchange, recapitalization or other transaction or series of transactions to reduce its funded recourse debt and address its nearer-term maturities. The company’s counterproposals to lenders and noteholders appear aimed at pushing out maturities while keeping net debt relatively constant due to the use of par exchanges of cash and new debt for existing debt. Cash interest would improve slightly under the company’s proposals. However, both noteholders and lenders request higher interest rates on new debt under their proposals to the company.

The company undertook these discussions on a confidential basis pursuant to nondisclosure agreements or confidentiality provisions with the following creditor groups:

  • Certain members of an ad hoc group of noteholders of the company’s 5.125% senior unsecured notes due 2023, 5.875% senior unsecured notes due 2024 and 6% senior unsecured notes due 2026;

  • Certain members of an ad hoc group of senior secured term lenders; and

  • The administrative agent and certain lenders under the senior secured revolving credit facility.


The company stated that as of Jan. 5, it had yet to reach an agreement with the respective creditor groups relating to the material terms of a potential transaction but “anticipates that negotiations concerning a Potential Transaction will continue.”

The company released cleansing materials that were presented in connection with these discussions, which included proposals and counterproposals for potential transactions with each creditor group. The following analysis outlines each of the company’s proposed transactions as disclosed in the cleansing materials.

The company’s capital structure, prior to any of the transaction proposals but pro forma for Dec. 31, 2021, with updated principal amounts disclosed in the presentation, is shown in the table below:

(Click HERE to enlarge.)

Ad Hoc Term Lender Group: Amend and Extend Secured Debt

The ad hoc term lender group proposed an exchange at par of $762 million of an existing term loan for $191 million of cash and $572 million of a new exchange term loan.

The company’s counterproposal to the ad hoc term lender group was as follows:

  • $762 million participating existing term lenders to exchange at par for:

    • $130 million cash, and

    • $632 million new tranche 1 exchange term loan (with a three-year maturity extension).



  • Existing revolving credit lenders to exchange for:

    • $550 million (down from $900 million) commitment new exchange revolving credit facility (with a three-year maturity extension), and

    • $200 million new tranche 2 exchange term loan (with a three-year maturity extension).




The company’s counterproposal to the ad hoc term lender group proposal is shown in the table below:

(Click HERE to enlarge.)

The company’s counterproposal to the ad hoc term lender group would result in an estimated reduction in liquidity from $572.9 million (pro forma for Dec. 31, 2021) to $292.9 million. In addition, the counterproposal would result in a slight reduction in total gross leverage to 6.4x, down from 6.8x. Pro forma annual interest expense would decrease slightly to $103.9 million, down from $114 million for the Sept. 30, 2021, LTM period.

As shown in the graphic below, the company’s counterproposal to the ad hoc term lender group would significantly push its 2024 maturity wall out to 2027:

Ad Hoc Noteholder Group: Exchange of Senior Unsecured Notes

The ad hoc noteholder group proposed an exchange at par in which participating senior unsecured noteholders would receive consideration in the form of cash and new senior secured second lien notes. The ad hoc noteholder group proposal was outlined as follows:

  • 5.125% senior notes due 2023 would receive par value consideration in the form of 50% cash and 50% new second lien notes;

  • 5.875% senior notes due 2024 would receive par value consideration in the form of 5% cash and 95% new second lien notes; and

  • 6% senior notes due 2026 would receive par value consideration in the form of 100% new second lien notes (no cash).


The company’s counterproposal to the ad hoc noteholder group was as follows:

  • 5.125% senior notes due 2023 would receive par value consideration in the form of 30% cash and 70% new second lien notes;

  • 5.875% senior notes due 2024 would receive par value consideration in the form of 5% cash and 95% new second lien notes; and

  • 6% senior notes due 2026 would receive par value consideration in the form of 100% new second lien notes (no cash).


The company’s counterproposal to the ad hoc noteholder group is shown below, assuming the following participation thresholds in the table below:

 

(Click HERE to enlarge.)

The company’s counterproposal to the ad hoc noteholder group would result in an estimated reduction in liquidity from $572.9 million (pro forma for Dec. 31, 2021) to $483.9 million. In addition, the counterproposal would result in a slight reduction in total gross leverage to 6.6x, down from 6.8x. Pro forma annual interest expense would decrease slightly to $99.4 million, down from $114 million for the Sept. 30 LTM period.

As shown in the graphic below, the company’s counterproposal to the ad hoc noteholder group would do little to address its 2024 maturity wall, which consists primarily of secured debt:



Conclusion: Amend and Extend of Secured Debt and Sr Notes Exchange

Included in the cleansing materials, the company provided a comprehensive outline of both the ad hoc term lender group and ad hoc noteholder group counterproposals, which is summarized in the table below:



(Click HERE to enlarge.)

The outlined comprehensive refinancing, consisting of amending and extending secured debt and uptier exchanging unsecured notes, would result in an estimated reduction in liquidity from $572.9 million (pro forma for Dec. 31, 2021) to $170 million. In addition, the counterproposal would result in a reduction in total gross leverage by about one turn to 5.9x, down from 6.8x. Pro forma annual interest expense would decrease slightly to $99.1 million, down from $114 million for the Sept. 30 LTM period.

As shown in the graphic below, amending and extending secured debt and uptier exchanging unsecured notes would push the company’s maturity wall to 2027 from 2024, with no funded recourse debt maturities until 2026.



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