A private-equity owned provider of snack food and other products to prisons in the US has struggled to refinance its debt, in the latest sign that for a rising number of investors, the incarceration industry is becoming a taboo corner of the market.
TKC Holdings, owned by HIG Capital, began marketing a $1.125bn loan last week to refinance older debt. However, bankers at Jefferies cut the size of the loan by almost $200m after a lukewarm reception from investors, according to people familiar with the deal. The deal has also taken longer than initially planned to complete.
The challenges facing TKC, which owns two companies that serve the prisons sector, mirror a similar saga that unfolded earlier this month involving the building of two prisons in Alabama. Barclays and KeyBanc Capital Markets, two of the underwriters of that deal, pulled out after facing a backlash from investors and activists.
“Any business whose model is a beneficiary of increased levels of incarceration is really being met with a number of institutions that are outright prohibiting participation,” said Steven Oh, global head of credit and fixed-income at PineBridge Investments. “It limits the potential buyer base.”
Opposition to the private prisons sector has started taking hold in recent years in Washington and on Wall Street alike, after activists highlighted alleged human rights violations and called to cut off companies profiting from a US criminal justice system that disproportionately punishes people of colour.
Big banks have said they will no longer be financing the sector, and President Joe Biden signed an executive order in his first month in office to roll back the Department of Justice’s use of private prisons.
S&P Global Ratings noted in a report in November that Biden’s proposals largely target federal prisons, which account for less than 10 per cent of TKC’s revenue. However, fund managers have also increasingly shifted their focus towards social issues that could pose risks to their investments, sparking a rethink on the entire prisons sector.
In this latest deal, the pushback prompted TKC and Jefferies to increase the size of a corporate bond sale alongside the loan deal, paying a higher rate of interest to secure the total amount of funds.
The deal’s struggles were previously reported by Bloomberg. TKC, HIG and Jefferies did not immediately respond to a request for comment.
“[Social and sustainability] considerations should be part of any credit underwriting policies, and a failure to incorporate them could result in unwanted downgrades or even defaults if one were to take the lack of willing investors to the extreme,” warned Mark Holman, the chief executive of TwentyFour Asset Management, after the municipal-bond offering for Alabama prisons stumbled earlier this month. “How would debt laden companies be able to refinance their maturities without willing investors?”
TKC owner HIG has other prison-focused companies in its portfolio, making the company a target of activists in the past. The buyout group owns Wellpath, which provides healthcare services in prisons.
“HIG Capital is the most prolific private equity investor in prisons,” said Jim Baker, of the Private Equity Stakeholder Project advocacy group. “Companies like HIG and their portfolio companies, very clearly prey on communities of colour, prey on . . . both the people who are incarcerated and their families.”