GEO Group has announced that they were going to exchange their debts due in 2023, 2024, and 2026 for 2028 notes. The 2026 notes will be privately exchanged, while the 2023 and 2024 ones will be available to retail investors.
The bondholders have the option to exchange their 2023 and 2024 for bonds maturing in 2028 with a higher coupon rate of 10.500%. They may also choose to receive part of the exchange as cash.
These notes due in 2023 and 2024 were putting much pressure on the balance sheet of GEO Group and there were fears of a default.
With this exchange, GEO Group has more options in the short-term as they have transferred the debt burden to the future.
Of course, it doesn't come for free. The new bonds have a higher coupon and, therefore, the interest expenses of the company will increase. In 2022, they are expecting an additional interest expense of $30 million and in 2023, $40 million. On average the interest expenses are expected to increase by 20% with about 15% reduction in the Adjusted Funds From Operations (AFFO - A good approximate to the Owner's Earnings) per year.
The new average expected AFFO is now around $250 million. With a current market cap of less than $900 million, the Earnings Multiples is less than 4, showing how undervalued GEO Group stock is. The fears of a default are now gone and GEO Group has more options in front of it. Since the company is no longer a REIT, it doesn't have to pay a dividend and can use its cash flow in addition to its $598 million cash reserve to repay more of its debt.
GEO Group is nowhere near bankruptcy and even if we disregard a potential Republican victory in 2022 and 2024, it looks like a good investment for the next 2-3 years. It is risky but the potential reward is big.