Debt Restructuring Often Overlooked
By Morgan Jones
Restructuring your debt is one option when jails default on bond payments, a move that can keep a jail open without selling the facility to a private operator, according to a municipal bond dealer who recently restructured the debt for a jail in Irwin County, Ga.
Two years ago, Irwin County defaulted on bond payments for the 350-bed jail and was forced to close the facility. The jail recently opened again after the debt was restructured by municipal bond brokers at Bergen Capital Inc. “I think there are a lot of jail deals out there, and no one’s out there successfully restructuring them,” says Jim Swan, senior vice president at Bergen.
Bergen bought the defaulted bonds from the original bond holder and, as sole creditor, reworked the deal for the county. The firm also paid for capitalized interest in a debt services reserve account and funded a $1 million renovation to reopen the facility.
“We insisted on doing the renovations, and put the money with the trustee for renovations, and put together a timeline and put down how they would select the contractor,” Swan says. “So we put in some features to give guidance without micromanaging the trustee.”
Where many bond brokers would have remained in the background, Bergen Capital took an active role in an unfamiliar market. “We took the hard position,” Swan explains. “We were not an agent; we were the principal.”
Swan believes that being assertive is crucial when competing against private correctional management companies protecting what they see as their turf. “It's a wild, wild business model and program, and the managers don't want you to know anything about it,” Swan says. County officials with a jail in default can often be persuaded that selling to a private firm is the only option.
“I explain that the operator/manager is just trying to squeeze us, the creditor,” says Swan. “Let's not pretend that Bergen Capital doesn't exist. And let's not have a private operator tell you they want to do certain things when all of it is at our expense. It's not going to happen, because we have a first mortgage lien.”
Though Bergen Capital was experienced in municipal bond deals, Irwin County was its first jail deal, requiring Swan to learn the ins and outs of the jail business, including population projections and understanding the motives of the various players. He says private prison companies push counties to pursue federal contracts, often sidestepping the possibility of retaining jails for county use.
“It was a tough process, but we worked carefully so that this didn't turn into another Grady County.” Swan is referring to the cautionary tale of Grady County, Okla., where two privately-financed jail projects were based on unrealistic inmate population projections.
“There's a lot of different stories on Grady, but essentially the grand jury said it never could have worked,” says Swan. “The projected per diem was too high and the U.S. Marshals Service was never going to come in on that level. The state DOC was never going to be there. It just was not going to work for that dollar amount.”
Though a grand jury did not find any wrongdoing on the part of Grady County officials or the architect/developer, it cited overly optimistic revenue projections in assessing the project's feasibility. Finding blame for the miscalculation is moot, since it is often the county officials who are held responsible.
Recent felony indictments in Willacy County, Texas, are another extreme indication of how much pressure can be directed at a county to seek a contract to house federal inmates. Two former Willacy County commissioners waived indictment and admitted accepting more than $10,000 each for their votes to get federal prison contracts.
A plea bargain in the Willacy County case could lead to more indictments in April, investigators say.
“For someone to get in there in Grady County and rework the deal, they'd have to work very cautiously, because there's a thousand land mines you could step on,” Swan warns. “It's difficult to succeed in this sector because there are a lot of forces working against you. All I did was work cautiously on solving the issues and figuring out what was the motive and platform of each player.”