DALLAS (S&P Global Ratings) April 5, 2019--S&P Global Ratings affirmed its 'BB' long-term rating on La Paz County Industrial Development Authority (IDA), Ariz.'s revenue bonds, and removed the rating from CreditWatch where it had been placed with negative implications Dec. 21, 2018. The outlook is stable. We removed the rating from CreditWatch following communication with the federal entity that funds the contract, the operator, and the facility. The rating reflects our opinion of:
- The industry's inherent volatility, primarily because of the potential fluctuation in facility demand, its essentiality, and the uncertainty created by event risks and changes in policy at the federal level;
- The short-term nature of the contract supporting the pledged revenue, which does not cover the life of the bonds and allows for termination for convenience at any time; and
- Less than 1x maximum annual debt service (MADS) based on 2018 annual operating income, but adequate annual debt service coverage (DSC), averaging 1.37x on a net 2018 basis.
Offsetting strengths include:
- The lack of capacity within the U.S. Immigration and Customs Enforcement (ICE) detention center system and an increased emphasis on fully compliant detention centers that meet ICE's priorities, which we believe increases the essentiality of the Holtville facility; and
- Management & Training Corp. (MTC), a well-established operator of detention and correctional facilities, will operate the facility, pursuant to an operations and management agreement.
"The stable outlook reflects our expectation that ICE will continue to the facility at levels similar to those in prior years, given the lack of federal facilities to house detainees, and that net revenues may fluctuate, but will continue to provide at least adequate net DSC," said S&P Global Ratings credit analyst Ann Richardson. In addition, the outlook is based on our view that MTC will continue to manage and operate the facilities according to federal standards, and that ICE, the primary funding agency, will renew its contact with the facility. As a result, it is unlikely that we will change the rating over the one-year outlook horizon. We could raise the rating if the agreement between Imperial and ICE were to strengthen, and if coverage ratios were to improve, indicating sustained demand for the facility. We could lower the rating if there were a material decrease in demand for the facility that resulted in dilution of coverage, lack of contract renewal, or a shift in federal policy or law that dictates a reduction in appropriations.
