The deal has already gone down well with lenders. Quotes on Aventiv’s existing first lien term loan (rated B2/B) have ripped from 72 cents on the dollar to around 90, while the second lien notes (rated Caa2/CCC+) have jumped to 81.5, from 55.5 before the refi was announced.

“It’s a huge win,” said a trader following the transaction. “Even if they [investors] are rolling, to get a par pay down is nice, assuming it gets done.”

Aventiv is likely to lean heavily on existing lenders to support the deal, given mounting pressures on institutional investors to cut exposures to companies in the prison sector, sources said. Other issuers in the sector, such as TKC Holdings, have faced similar pressures when raising debt.

“The focus on private prisons is a big deal from an ESG standpoint,” said a CLO manager. “We want to avoid any affiliation. It’s a highly regulated business, and these regulations have changed over time.”

Platinum has past experience of dealing with this scrutiny. In 2019, the sponsor reorganized Securus’s corporate structure in response to criticism from prison-reform activists and politicians including Senator Elizabeth Warren.

Rating boost

There’s an element of self-help to this transaction. 

The deal will take out the debt that was issued back in 2017 to fund Platinum’s acquisition of Securus, which included a first lien TLB alongside second lien paper and was subsequently upsized in 2018. 

The refinancing will bolster Aventiv’s balance sheet and improve its ratings, potentially putting the company in a better place to succeed. But Aventiv has not exactly been the best-performing credit, so some investors may just want to cash out now.

”One path is not to do anything, and then the company defaults,” said a buysider following the deal. “The other path is you roll, and the sponsor puts money in, you extend the maturity of the loan, and then this thing may trade at higher levels, and then you can exit.

“So there's no magic bullet, but sometimes it's a matter of choosing the better of two unpleasant options.”

Assuming the deal goes through, the company will carry B3/B- ratings, after a one notch upgrade by S&P. The new loan and bond carry the same ratings, and both Moody’s and S&P have changed their outlooks on the company to positive. 

As part of the deal, Aventiv will repay $135m of revolver borrowings and net leverage will drop to 4.5x from 6.7x currently. 

That figure is based on $265m of pro forma adjusted EBITDA for 2022, which includes $35m of adjustments from headcount and non-headcount savings programs that have already been achieved. The company generated $594m of revenue last year.

Aventiv won’t have much cash on its balance sheet after the refinancing, but it will retain $170m of capacity on its $225m super priority revolver. It is extending the maturity of that facility to January 2027, according to a lender presentation.

ESG pressure

The self-help aspect of the transaction is slightly complicated by ESG factors. 

Sticking with a prison-related investment is an increasingly tough ask for some investment committees. Despite a growing political backlash against ESG, the pool of lenders that remain willing to fund the industry appears to be shrinking.

“From a perception standpoint, you’re fighting an uphill battle,” said one lender, who exited a position in private prison operator GEO Group in light of mounting pressure to sever ties with the so-called prison-industrial complex. 

“It doesn’t seem worth it for what seems like a relatively small position,” the lender added.

Private prison operators such as GEO and CoreCivic have been working to reduce their dependence on capital markets, wary of their narrowing financing options as some banks and lenders have cut ties with the industry in recent years.

That’s not to say financing isn’t available at a price. Other borrowers such as prison food provider TKC Holdings and ViaPath Technologies (formerly known as Global Tel*Link Corporation, or GTL for short) were able to tap the leveraged loan market for funding last year. 

Changing times

Aventiv’s turnaround story over the past few years may also help position the deal more favorably.

Historically, the company generated the majority of its revenues and profits from traditional pay phone lines in prisons. This service has attracted a ton of regulatory attention: most recently the Martha Wright-Reed Bill was signed into law, giving the Federal Communications Commission the authority to regulate intrastate pricing of voice and video calls from correctional facilities.

Perhaps sensing the winds of change, Aventiv shifted its focus in recent years to rolling out a broader array of services beyond voice and video calls (this was part of the corporate reorganization we referenced earlier). 

The company has invested $550m in technology and infrastructure over the past three years, winning contracts to roll out 600,000 tablet devices across correctional facilities; these carry not only voice and video calling, but secure e-messaging, payment services, entertainment and educational programs to help inmates study for qualifications. 

As well as reducing phone call costs, this has lowered the share of revenue driven by voice and video calls to around 40%, compared to more than 75% before 2019. 

Having invested heavily in the tablet rollout, the company now plans to reduce capex by $100m in 2023, and drive free cash flow by charging more third-party vendors to put their apps and services on Aventiv’s tech infrastructure.

Making connections

While Aventiv is focusing on its new-look business model, there are other questions about the credit besides ESG matters. 

One lender following the deal cited the importance of prison suppliers’ agreements with customers, noting that losing a large statewide contract to a competitor can have a material impact on earnings. 

Aventiv, for its part, has told lenders that its investment in tech infrastructure provides a strong moat around its contracts. 

Another potential concern are the covenants. In its report, Moody’s highlighted the company’s significant incremental debt capacity as well as the ability to transfer assets to unrestricted subsidiaries.

Still, the equity injection may ultimately win over investors and some think the company can handle the ESG pressure, too. 

During investor calls this week, Aventiv executives said that maintaining communication with friends and family plays an important role in reducing the rate of recidivism among former convicts (although it did not cite evidence of this in a lender presentation seen by 9fin).

“There are ESG concerns, of course, so it will price accordingly,” said the trader. “But in ESG there’s a sub-bucket for something like this. You can argue it’s actually helping people, like TKC which provides food.”

Aventiv and Platinum Equity did not respond to a request for comment. Deutsche Bank declined to comment.