Fitch Assigns Initial 'BB+' IDR to Corrections Corp.; Credit Facility at 'BBB-'

Fitch Ratings has assigned a 'BB+' initial Issuer Default Rating (IDR) to Corrections Corp. of America (CCA). Fitch has also assigned a 'BBB-' rating to the company's $785 million secured credit facility, and a 'BB+' rating to $645 million of senior unsecured notes. The Rating Outlook is Stable.

The 'BB+' IDR considers the attractive long-term credit characteristics of the private correctional facilities industry, including: (1) overcrowding of public prisons, (2) modest private sector penetration of prison populations, and (3) economically defensive characteristics of prison populations.

CCA maintains a leading position (44% market share) in the industry, which is highly concentrated and has significant barriers to entry. GEO Group is its largest competitor with about 31% market share. Fitch also views the industry in the context of a comparable set that includes hotels, hospitals, private prisons, and REITs.

The U.S. private correctional facilities industry is at an early stage of its industry life cycle. Although the privatization of correctional facilities dates back to the early 1980s, only about 10% of beds are currently outsourced. The number of outsourced beds has grown from 11,000 in 1990 to more than 205,000 today, or a CAGR of 15.7% over that time frame. In contrast, roughly 20% of hospital beds are privatized.

CCA's business reflects the stability tied to contractual income. CCA enters into contracts with the federal, state, and/or local governments that guarantees (1) a per diem rate or (2) a take or pay arrangement that guarantees minimum occupancy levels.

However, the short-term nature of the contacts with governmental authorities is a concern. Typical contracts are for roughly 3 - 5 years with multiple renewal terms, but can be terminated at any time without cause.

Additionally, contracts are subject to legislative bi-annual or annual appropriation of funds, so strained budget situations at federal, state, and local levels could pressure negotiated rates. Mitigating this concern is that the company had strong relative financial performance through the recent recession.

The company received six requests for assistance with contracts in 2009 - 2010, but only one in 2011. CCA was able to adjust cost items in contracts to compensate for reduced revenue levels such that the contracted profit did not deteriorate. Since 2007, Fitch calculates that EBITDA has grown from $354 million to $455 million on an LTM Sept. 30, 2011 basis, without reflecting a decline in any single year.

Another concern is that the company's customers are concentrated. Federal correctional and detention authorities made up 43% of revenues in 2010 and primarily includes the Bureau of Prisons (BOP; 16%), the United States Marshals Service (USMS; 15%), and the U.S. Immigration and Customs Enforcement (ICE; 12%). State customers accounted for 50% of revenues in 2010 with the California Department of Corrections and Rehabilitation (CDCR) making up 13%.

Value of Real Estate is Limited:

Based on a cost of $60,000 per bed, the replacement cost of the company's 45 facilities is around $3.8 billion, which compares to roughly $1.2 billion of debt and a current enterprise value of $3.5 billion.

The company's real estate holdings provide only modest credit support in Fitch's view. There are limited alternative uses of prisons, the properties are often in rural areas, and there is no established mortgage market as a contingent liquidity source. However, the facilities do provide essential governmental services, so there is inherent value in the properties. Additionally, prisons have a long depreciable life (50 years) with a practical useful life greater than that (~75 years) and CCA has a young owned portfolio (average age of ~15 years)

CCA Maintains a Strong Financial Profile:

As of Sept. 30, 2011 Fitch calculates total debt/ LTM EBITDA of 2.7x, interest coverage of 6.2x, and FFO fixed charge coverage of 4.9x.

CCA maintains solid financial flexibility as it generates annual FFO less maintenance capex of roughly $250 million that can be used to support an ample amount of fluctuations in accounts receivable, prison construction, share repurchases, and/or dividends.

Ratings incorporate management's current financial policies including: (1) a target leverage ratio of 3.0x; (2) a fixed charge coverage of no less than 3.5x; and (3) minimum liquidity of at least $100 million. The company's ROI hurdle rate is 13% -15% cash-on-cash, pre-tax EBITDA returns to all capital investments.

CCA's debt maturity profile is attractive. The company executed a credit facility refinancing transaction on Jan. 6, 2012, for $785 million, which replaced the existing $450 million facility, extended the term to Dec. 2016, repaid $335 million of 2013 unsecured notes (out of $375 million outstanding), and achieved pricing of L+150.

Following the transaction, outstanding unsecured bonds include $40 million of 6.25% senior notes due 2013, $150 million of 6.75% senior notes due 2014, and $455 million of 7.75% of senior notes due 2017.

The secured credit facility is rated 'BBB-', one notch above the IDR. CCA's accounts receivables are pledged as collateral, which totaled $261 million as of Sept. 30, 2011. Equity in the company's domestic operating subsidiaries and 65% of international subs are also pledged as collateral, but long-term fixed assets are not pledged.

As of LTM Sept. 30, 2011, leverage through the secured credit facility was roughly 0.5x and 1.0x on a fully drawn basis. On an LTM Sept. 30, 2011 basis and proforma for the refinancing transaction, leverage through the secured credit facility would be roughly 1.6x on a fully drawn basis.

Considerations for an investment grade IDR include the following:

--Further penetration and public acceptance of private correctional facilities;

--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 and $150 million minimum liquidity); and

--Minimal secured debt in the capital structure.

Considerations for downward pressure on the 'BB+' IDR and/or Stable Outlook include:

--Increased pressure on per diem rates from customers;

--Decreasing market share gains and/or notable contract losses;

--Material political decisions related to long-term dynamics of the private correctional facilities industry;

--Leverage sustaining above 4.0x and FFO fixed charge coverage sustaining below 4.0x;

--Increased secured debt in the capital structure.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011);

--'Recovery Ratings and Notching Criteria for Non-financial Corporate Issuers' (May 13, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

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