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Moody’s downgrades Radiology Partners, citing ‘very high leverage’

Marty Stempniak | December 05, 2023 | Radiology Business | Economics

Moody’s Investor Service downgraded Radiology Partners’ credit rating on Nov. 28, citing the provider group’s “weak liquidity” and “very high leverage.”

Analysts said the decision reflects increasing risk for Rad Partners, which faces forthcoming debt maturities and the threat it may need to execute a distressed exchange. The El Segundo, California-based radiology provider’s obligations include $335 million drawn from its revolving credit line, expiring in November 2024, and further due dates looming in 2025.

“Moody's believes that the company's high leverage and volatile refinancing conditions may challenge the company's ability to address near-term maturities,” analysts Adam Chaim and Ola Hannoun-Costa reported.

The ratings agency downgraded Rad Partners’ corporate family rating from Caa1 to Caa3—both designations denoting debts of “poor standing” that are “subject to very high credit risk.” Analysts issued a “stable” outlook for RP while highlighting its “dominant position in a fragmented industry,” diversification by geography and customer type, and “favorable” payer mix.

Moody’s estimated that Rad Partners’ debts were roughly 10 times its earnings (before interest, taxes, depreciation and amortization) as of Sept. 30. Experts anticipate company leverage to continue declining over the next 18 months, fueled by “new business wins” and ongoing pricing initiatives.

Over the 12 months ending Oct. 1, Rad Partners raked in roughly $2.9 billion in revenues. But it will face weak liquidity during the next year and a half as it grapples with hefty debt payments. The company had about $57 million of cash and $104 million available from its revolving credit line at the end of the third quarter.

“Moody's expects modestly positive free cash flow in 2024 reflecting improved margins on pricing initiatives, the benefit of cost [saving] initiatives, lower capital expenditures, and a continued decline in cash add-backs,” the analysis noted. “Collection of an arbitration award tied to a payer dispute is not included in Moody's estimates due to uncertainty surrounding the timing of collection,” analysts added, likely referring to a recent preliminary arbitration decision in an ongoing dispute with UnitedHealthcare.

In reaching their decision, analysts also highlighted RP’s “track record of debt-funded growth” and exposure to wage inflation, labor shortages, and possible reimbursement rate adjustments.

The analysis noted that Rad Partners could see a ratings upgrade if it successfully refinances its capital structure, extending maturities and “materially improving liquidity.”

“Our business is performing well, with double digit revenue and earnings growth in the third quarter of 2023, and we have strong liquidity to meet our near-term obligations,” a spokesperson told Radiology Business Monday in response to the ratings action. “Consistent with our typical practice, we are evaluating various opportunities to optimize our capital structure.” 

Radiology Partners is one of the largest imaging groups in the U.S., employing over 3,600 physicians who service 3,260 hospitals and outpatient facilities in all 50 states. Physicians own about 33% of RP, with private equity firm Whistler Capital, venture capital group New Enterprise Associates and the Australian sovereign wealth Future Fund holding the balance.

S&P also downgraded Rad Partners in June, citing worries its capital structure could become unsustainable. At the time, experts estimated the organization held roughly $3.37 billion in obligations.

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