GEO Group (NYSE: geo) successfully closed the modification and extension transaction to smooth its maturity wall. The previous deadline of $2.0 billion in 2023 and 2024 is largely pushed back to 2026-2027. There are a few heel pieces left in 2023 and 2024 but the sizes are small and the company will be able to cope with them using the cash generated by the operation. Below is the new capital structure:
GEO is targeting 3.5x leverage by the end of 2023 and below 3.0x by the end of 2024. This deleveraging target appears to be achievable on my cash flow model using the most guidance more recent and assuming the status quo. As a reminder, GEO is required to use 80% of excess cash to pay various parts of its senior capital structure (i.e. term loan and RCF), in addition to any mandatory amortization and voluntary redemption.
GEO 10.5% 2028 2L banknotes
Within GEO’s capital structure, I like the new 10.5% 2L notes the most. You can probably get bonds in the context of $96-97. At $96.5, this bond has a yield of 11.3% YTW and a current yield of 11%. Starting leverage through the 2L tranche is 3.1x and rapidly drops to ~2.5x by the end of 2024. I also believe that GEO will try to remove this costly debt as soon as possible. GEO would have to apply excess cash flow to buy the bond in the market if it continues to trade below par. Alternatively, GEO will try to do a global refi for its entire capital structure once net leverage drops to ~3.0x in 2024. A much more digestible leverage profile and political landscape more favorable should reduce the cost of debt for GEO in a few years.
GEO 5.875% 2024 Talon
After the amend and extend transaction, only approximately $23 million of these notes remain in circulation. The company has already revealed its plan, stating in the press release that:
Following the closing of the transactions, GEO will have approximately $200 million in unrestricted cash and cash equivalents in the domestic market and total liquidity of approximately $375 million. With its available cash, expected future proceeds from the sale of certain non-core assets and its current free cash flow run rate, GEO expects to be able to repay in full the amounts of outstanding debt that will be due in 2023 and 2024, after giving effect to the Transactions, before their stated maturities.
The 2024s are redeemable at par on October 15, 2022. I believe the 2023 and 2024 stubs will be retired together before the end of the year. At $96, the bond is yielding 19.5% through the end of 2022. Holding this one to maturity isn’t a terrible investment either at ~8.0% YTM for a paper. 2 years.
GEO equity is up 15% since I last upgraded it to a buy. Equity is still very cheap on all the metrics you look at (EV/EBITDA, P/AFFO, FCF Yield). At ~$8.50, the market is implying -2.0% terminal growth and a 15.5% discount rate, which seems too punitive. I believe the midterm election should relieve political pressure if Republicans can gain traction. However, share buyback and/or dividend restatement will likely take place in the 2024-2025 period, but share values should strengthen from now on as GEO continues to deleverage.
As expected, the parties were able to find common ground on how to handle GEO’s tight maturity schedule. GEO’s deleveraging target appears to be on track thanks to its tight cash position and service essentials. GEO’s capital structure offers a menu of decent investment opportunities: the newly minted 10.5% 2L notes are one of the safest ways to a +10% return I can think of; the 2024 stub can be considered a high-interest GIC at this point; GEO shares continue to be undervalued despite the recent rally with a near-term catalyst in sight.