Fitch Upgrades Reeves County, Texas' $89MM COPs To 'B'; Outlook Stable.

Business Editors

NEW YORK--(BUSINESS WIRE)--June 10, 2004

Fitch upgrades the underlying rating of approximately $89 million Reeves County, TX certificates of participation (COPs)-lease rentals (Reeves County Detention Center Trust) to 'B' from 'CCC' and removes the bonds from Rating Watch Positive. The Rating Outlook is Stable. The certificates are insured by various financial guarantors. Certificates financed construction of the west Texas county's 3000-bed prison, which markets itself to federal and state correctional agencies.

The upgrade reflects Reeves County Detention Center's (RCDC) improved ability to fund debt service and core operating costs under a new agreement with the federal government and a new contract to house Arizona state prisoners. The rating remains in the 'B' category, indicating highly speculative credit characteristics, for several reasons. First, RCDC's contracts are short term in nature, and RCDC's history demonstrates the difficulty in assuming prisoner populations from any agency will be predictable over a long period. In 2003 expected federal occupancy of a new portion of the facility did not materialize. Second, while RCDC's relationship with a for-profit management company, The GEO Group (formerly Wackenhut Corrections Corp.), has proved helpful in recent months, this relationship is now highly vital to RCDC's continued ability to function. The management agreement is terminable upon county nonpayment of an invoice, certificate default, or other specified reasons. The GEO Group is not rated by Fitch.

The county entered into an annually renewable contract with the Arizona Department of Corrections in March to house up to 864 new inmates in RCDC's phase three facility. More than 2,000 federal inmates already are housed at RCDC. The Arizona contract and a three-year intergovernmental agreement with the Federal Bureau of Prisons (BOP) executed in February have resulted in occupancy near the projections of the county at the time of the last certificate issuance in 2001. Accordingly, RCDC has more capacity than before to meet its own debt service and core operating costs, at least for the short term, so long as BOP and Arizona use the facility. The ability of the facility to generate sufficient funds to pay fees to its for-profit manager and surpluses to the county is less certain.

A forecast assuming RCDC houses 3,039 inmates shows 1.51 times and higher annual coverage of debt service, not counting management fees, county transfers, and other subordinated costs. The same forecast, assuming all subordinate payments and assumed or agreed-upon annual revenue increases, shows a declining cash balance in 2005, followed by slowly increasing balances thereafter. While the coverage and other projections are promising, they are reliant on continued use of RCDC by BOP and Arizona, and the county's contracts with each of these counterparties are short term in nature. The 2001 certificates mature through 2013.

Net debt service on the certificates rises sharply beginning in 2005, from approximately $10.6 million in 2004 to $12.4 million in 2005. By agreement with The GEO Group, the county has agreed to use its best efforts to 'restructure/refinance' its RCDC obligations to reduce annual costs below currently scheduled levels. The ability of the county to access the capital markets for this purpose is unable to be assessed by Fitch.

'B' category ratings indicate highly speculative credit characteristics. Significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is contingent upon a sustained, favorable business environment.