Wackenhut Pushes Leverage With Stock Purchase

Wackenhut Corrections Corp.'s heightened leverage is the biggest concern for Moody's Investors Service, which has given a Ba3 rating to the company's new $150 million credit facility. Proceeds from the deal will go toward financing the correctional facility company's purchase of all its shares currently held by majority shareholder Group 4 Falck, a Danish security firm. "The transaction weakens the company's profile because it increases its total leverage [and] it also reduces the fixed charge coverage on their debt," said Philip Kibel, v.p. and senior credit officer at Moody's. But the repurchase of the Group 4 Falck's ownership is a significant benefit for Wackenhut. "They will become a fully independent company now [with] operating autonomy," Kibel said.

Reliance on government appropriations for payment of awarded contracts is another concern. "What if the government doesn't want to appropriate?" Kibel asked. Moody's states that although governments as obligors pose little credit risk, management contracts are subject to such fund appropriations. "Failure by a government agency to receive such appropriations could result in terminations of the contract by such [an] agency, or reduction of the management fee payable to the company," Moody's explains.

Though contract renewal risk exists, Wackenhut has a 100% renewal rate, Kibel said. "Once they get the contract, they keep it," he noted. Kibel added that Moody's sees a strong underlying demand for Wackenhut's corrections industry as the privatization of prisons looks like it could be on the rise. Kibel noted that studies have shown that privatization saves money for the state and government agencies that usually run the facilities.

Also, Kibel noted that Wackenhut has diversified contracts with different authorities, a positive management team and a high barrier-to-entry market. "You need expertise to enter this business," he said. Factors such as solid historical performance, good growth potential, high occupancy rates and a business model that concentrates more on managing properties rather than owning properties--reducing capital investment exposure-- also reflect positively on the rating. The deal includes a $50 million revolver and a $100 million "B" term loan. Calls to Wackenhut officials were not returned.