S&P: Reeves County, TX Revenue Bond Rating Lowered To 'B+' From 'BBB+'; Outlook Is Negative
On Aug. 18, 2016, the U. S. Department of Justice (DOJ) released a memo directing the Federal Bureau of Prisons (FBOP) to "reduce and ultimately end the use of privately operated prisons" based on the assertion that they do not maintain the same level of safety and security and do not save substantially on costs relative to facilities operated by the FBOP. "This policy shift has the potential to have a significant and near-term impact on the credit quality of the bonds due to the nature of the federal contract," said S&P Global Ratings credit analyst Kate Boatright. As noted in the DOJ memo, all of the contracts with the FBOP are term-limited and subject to rebidding and termination.
The FBOP's action also affects our assessment of the county's ability to operate, and subsequently make annual debt service payments. The negative outlook reflects our concern that the DOJ's decision reflects a change in federal policy that creates ongoing operating uncertainty and could reduce the county's ability to make future debt service payments in the absence of more sustainable revenues. We will continue to monitor the situation and take rating actions as necessary.
The negative outlook reflects the possibility that we could lower the rating further given the potential for the contract with FBOP to be cancelled or not renewed. In the event of a contract cancellation, which would likely cause revenues to cease, we believe that the current reserves on hand could not cover debt service beyond the next year. In that scenario, absent the identification of alternative revenue, we would likely lower our rating by more than two notches. If the contracts supporting the RCDC are renewed but their scope of utilization is significantly reduced, we would likely lower the ratings by at least one notch, reflecting the potential dilution of DSC and reduced essentiality of these facilities. Should the contract with FBOP remain in place, despite the DOJ announcement, or should the contract with FBOP be cancelled but the county finds alternative inmates to generate revenue, we could revise our outlook to stable.