JP Morgan Chase Bank Used Secretive Bonds to Finance Kansas Prison Construction
by Matt Clarke
Recently discovered evidence in a Thomson Reuters database revealed that, in June 2018, JP Morgan Chase Bank (JPMC) underwrote a $159.5 million bond to finance private prison operator CoreCivic’s construction of a 2,432-bed facility in Kansas. JPMC was already the largest debt holder for private prison firms CoreCivic and GEO Group.
Make the Road New York, a nonprofit dedicated to improving the lives of immigrants and working-class Americans, teamed up with Educators for Migrant Justice and two other organizations to establish a campaign that publicizes businesses it labels “Corporate Backers of Hate.” The group discovered the Kansas prison bond details in the Reuters database, which were confirmed by Bloomberg Business News.
The Kansas bond was issued via an unusual financing method known as “private placement,” which allowed JPMC to keep the names of the investors and financial partners secret. As the Sole Placement Agent for the bond, the bank marketed it to a group of potential investors without the need for a rating or prospectus – typical requirements for a public bond offering.
The prison construction project also represented a departure from the way CoreCivic usually does business – either constructing and operating its own prisons and jails, or operating facilities owned by government agencies. The new Kansas prison will be run by the state’s Department of Corrections (DOC), and will replace the 155-year-old Lansing Correctional Facility. CoreCivic won a competitive contract to build the prison; it will lease it to the state, which will take full ownership at the end of a 20-year term. The company will receive lease payments starting at $14.9 million during the first year, with two percent annual increases. The total cost is estimated at $360 million.
This type of transaction fits in with the transformation of CoreCivic and GEO Group into Real Estate Investment Trusts (REITs). [See: PLN, Jan. 2013, p.42]. REITs receive an exemption from most corporate taxes, provided a sufficient amount of their income is derived from real estate. In the Public Interest (ITPI), an organization opposed to prison privatization, revealed that GEO Group saved $43.6 million in taxes in 2017 thanks to its REIT status.
“It’s very important that they own real estate,” said Shar Habibi, ITPI’s research and policy director. “They see it as a way to get into the states that haven’t been amenable to privatization. They are going into those states and saying, ‘We can build this [prison] for you.’”
But building construction requires large amounts of capital. That’s where JPMC comes in, though the choice of a private placement for issuing the bonds was odd.
CoreCivic spokesman Steve Owen said the private placement “directly benefited Kansas by reducing their annual lease payment to CoreCivic versus alternative financing methods.” That is a questionable claim, however, since private placement bonds generally have to offer higher interest rates than public bonds to attract investors.
In this case, the 20-year bond offered a yield of 4.43 percent, while a July 2017 Kansas legislative audit estimated the state could have issued its own bonds at a rate between 3.4 and 4.1 percent, concluding that “bond financing with contracted maintenance appears to be less expensive than leasing through a long-term lease-purchase agreement.”
“If something’s already a publicly traded company and it’s doing a private placement, it would usually be because they need the money really quick,” said senior Frontline Analysts research adviser Daniel Davies, who wrote a 2018 history of financial fraud titled Lying for Money: How Legendary Frauds Reveal the Workings of Our World. “If they’re already public and they aren’t in a hurry, I would say it’s weird.”
One possible motive for the private placement was secrecy. For years, JPMC has been criticized for being financially entangled with private prison companies while professing to champion the rights of minorities and immigrants.
As of September 2018, over 85 organizations opposed to U.S. immigration policies had called on JPMC and another bank, Wells Fargo, to discontinue financing for CoreCivic and GEO Group.
“This [Kansas] deal is just the latest example of how JP Morgan Chase, while claiming to support immigrants and communities of color, continues to bankroll the companies that put members of our communities in cages,” said Daniel Altschuler with Make the Road New York.
JPMC declined to comment on its relationship with private prisons and immigrant detention. Wells Fargo issued a statement urging concerned people “to reach out to elected officials and let them know their feelings.” Pablo Paez, a spokesman for GEO Group, asked critics to remember that his firm has “absolutely no role in setting criminal justice or immigration policies,” even those from which it profits. CoreCivic issued a similar statement.
In July 2018, eight activists were arrested while protesting outside the Manhattan mansion of JPMC Chairman Jamie Dimon, a day before another group of activists protested at the New Jersey home of a Wells Fargo board member.
As for the new prison in Lansing, in February 2019 Kansas Governor Laura Kelly said the state had been “hoodwinked” into the deal with CoreCivic, with the understanding the facility would cost less due to fewer staff members being needed.
“I doubted at the time that they could really safely reduce staff at the numbers that they were talking about, so this comes as no surprise to me,” Governor Kelly stated.
“It probably is more efficient than the existing one, but I think our question is, is it as efficient as has been promised, since it’s going to be paid for by staff savings?” added Kansas Interim Corrections Secretary Roger Werholtz. “I think they may have been a little aggressive in the savings that were projected.”
According to a fact sheet produced by ITPI, JPMC has “played a leading role” in financing private prison firms, and is therefore “complicit with private prison companies in contributing to and enabling mass incarceration and the criminalization of immigration.”
ITPI noted that in addition to the Kansas prison project, the bank had extended a $132.5 million line of revolving credit to CoreCivic, as well as a $14.3 million term loan; further, it had extended – along with a group of other banks – a $900 million line of revolving credit to GEO Group; had underwritten at least $113 million in bonds for CoreCivic and GEO; and held $166 million in bonds for the two companies as of October 14, 2016.
Sources: inthesetimes.com, cnbc.com, forbes.com, cnn.com, cjonline.com, inthepublicinterest.org