Fitch Affirms Correction Corp.'s IDR at 'BB+'; Outlook Stable

Fitch Ratings has affirmed the credit ratings of Corrections Corporation of America (CCA) as follows:

--Issuer Default Rating (IDR) at 'BB+';

--$900 million secured revolving credit facility at 'BBB-';

--$675 million senior unsecured notes at 'BB+'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The affirmation of CCA's IDR at 'BB+' reflects the company's strong credit metrics offset by declining occupancy rates and contract losses. Over the last year, the company has benefited from refinancing its unsecured bonds at a lower cost, thus improving its fixed-charge coverage ratio. The company also upsized its secured revolving credit facility, improving its liquidity. CCA converted to a Real Estate Investment Trust (REIT) with a Taxable REIT Subsidiary (TRS) structure in 2013. The REIT tax election reduces the company's ability to retain meaningful amounts of cash flow, a credit negative.

STRONG FINANCIAL METRICS

CCA has leverage that is low relative to Fitch's rated REIT universe, but in-line with broader corporates at the same rating level. Leverage was 2.9x for the Trailing Twelve Months (TTM) ended Sept. 30, 2013 versus 2.6x and 2.8x for full year 2012 and 2011, respectively. The increase was due primarily to declines in EBITDA due to lost contracts. CCA targets leverage of 3.0x with a maximum level of 4.0x. Fitch projects that leverage will rise moderately as the company moves forward with development projects but will remain below 3.5x. Fitch defines leverage as net debt plus operating leases and guarantees divided by recurring operating EBITDA.

Fitch does not expect the company to engage in meaningful shareholder-friendly activities such as share repurchases and would expect the company to allocate any free cash flow towards development and debt reduction.

CCA also has a high level of fixed-charge coverage. Coverage was 7.6x for the TTM ended Sept. 30, 2013 versus 6.7x and 5.6x in full years 2012 and 2011, respectively. Coverage has improved significantly in recent years as a result of refinancing debt at lower costs. Fitch projects that coverage will remain strong in 2014 and 2015. Fitch defines coverage as recurring operating EBITDA less recurring maintenance capital expenditures divided by interest expense incurred.

FALLING OCCUPANCIES

Average compensated occupancy was 84.1% for the quarter ended Sept. 30, 2013, down from a high of 99% for the quarter ended June 30, 2007. While CCA desires a certain level of vacancy in order to meet potential demand, occupancy has fallen steadily over the past six years. This trend has been driven by the company increasing its available beds from to 90,000 from 73,000 over the same time period coupled with contract losses which have resulted in idled facilities. Despite falling occupancies, CCA has grown its revenue per compensated man-day steadily and maintained its operating margin.

SOLID COMPETITIVE POSITION

The long-term credit characteristics of the private correctional facilities industry are attractive. 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 CCA is the market leader with 43% market share of all private prison beds. CCA's largest competitor, The GEO Group, controls 30% 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 but may experience periods of weakness due to cyclical factors such as long lead-time state budget decision making.

LIMITED REAL ESTATE VALUE

CCA'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 and there is minimal track record of secured debt for prison properties broadly. However, the facilities do provide essential governmental services, so there is inherent value in the contracts. Additionally, prisons have a long depreciable life of 50 years with a practical useful life of approximately 75 years. CCA has a young owned portfolio with a median age of approximately 16 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 CCA's unencumbered asset pool. Fitch would view increased secured lender institutional interest for prisons 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.

RELATIVELY STABLE CONTRACTUAL INCOME

CCA 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 three to five years with multiple renewal terms but can be terminated at any time without cause. Terms are typically exposed to a 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 downturn. CCA was able to adjust cost 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.

CONCENTRATED, BUT CREDIT WORTHY CUSTOMER BASE

CCA's customer base is highly credit worthy but slightly concentrated as evidenced by the top 10 tenants accounting for 81% of YTD revenues in 2013. The company's top three customers are large federal correctional and detention authorities, which collectively made up 43% of revenues for the nine months ended Sept. 30, 2013. The United States Marshals accounts for 18% of revenue, the U.S. Immigration and Customs Enforcement accounts for 13% of revenue and the Bureau of Prisons accounts for 12% of revenue. California, Georgia and Tennessee are the three largest state customers and collectively account for 24% of YTD revenue. The risk of revenue loss from the California corrections realignment program has been mitigated by recent actions from the state including new leases signed in 2013.

CONSERVATIVE FINANCIAL POLICIES

Management has stated a leverage target equivalent to 3.0x, with a cap at 4.0x. CCA maintains good financial flexibility as it generates annualized AFFO of nearly $300 million. Approximately 75% of AFFO will be used to support the dividend while the remaining 25% will go towards prison construction, debt reduction or other corporate activities. The company's ROI hurdle rate is 13-15% cash-on-cash, pre-tax EBITDA returns to all capital investments. CCA does not have any debt maturing until 2017.

ADEQUATE LIQUIDITY COVERAGE

CCA's liquidity coverage is 1.5x for the period Oct. 1, 2013 to Dec. 31, 2015. Sources of liquidity include unrestricted cash, availability under the company's credit facility and projected retained cash flows from operating activities after dividends. Uses of liquidity include development and other capital expenditures. CCA benefits from not having any debt maturities until 2017.

SECURED CREDIT FACILITY NOTCHING

The secured credit facility is rated at 'BBB-', one notch above the IDR. The secured credit facility is effectively senior to the unsecured bonds. CCA's accounts receivables are pledged as collateral for the secured credit facility. Accounts receivables were $220 million as of Sept. 30, 2013. 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 Sept. 30, 2013, leverage through the secured credit facility was approximately 1.3x based on the drawn amount, and 2.3x on a fully-drawn basis.

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013);

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Equity REITs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Criteria for Rating U.S. Equity REITs and REOCs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=818090

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Steven Marks, [phone]
Managing Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Paladino, CFA, [phone]
Senior Director
or
Committee Chairperson
Megan Neuburger, [phone]
Senior Director
or
Media Relations:
Sandro Scenga, [phone]
[e-mail]