S&P upgrades RadNet’s credit rating, citing ‘disciplined financial policy and growth agenda’

S&P Global Ratings upgraded RadNet’s credit rating on Thursday, citing the industry giant’s “disciplined financial policy and growth agenda.”

The boost comes with the Los Angeles-based imaging center chain recently closing a public stock offering, netting $245 million in proceeds after adjusting for underwriting fees and other expenses. RadNet plans to use $100 million to pay down a term loan, while the remainder will fuel expansion.

“The $259 million equity offering we completed last week and the upgrade we received to our corporate credit rating are seminal events for RadNet,” Executive VP and Chief Financial Officer Mark Stolper told Radiology Business by email. “We currently have the lowest leverage, highest liquidity and largest cash balance in our company’s history. Our strong financial status puts us in position to accelerate near-term growth through expansion in our existing regional markets, health system partnerships, continued targeted investments in artificial intelligence and strategic acquisitions.”

S&P upgraded RadNet’s rating from B to B+, a “speculative grade” signifying that the borrower’s bond still carries risk but is one tier short of “investment grade.” Analysts also issued a level 3 recovery rating, indicating that the agency anticipates “significant” chances of recuperation (50%-70%) if the company defaults on its loans.

The analysis highlighted RadNet’s “commitment to deleveraging,” with debts at roughly 4.5 times adjusted earnings (down from 5.2x in 2022). (Experts estimate that an ideal debt-to-equity ratio is about 2x to 2.5x.) In comparison, Radiology Partners, which just had its credit downgraded, has a ratio of roughly 10x to 10.5x.

RadNet’s revenues have increased by 1.5x over the past five years, S&P noted, with the company acquiring “numerous facilities” while developing close to 50 new locations, mostly through joint ventures. Since 2017, RadNet has seen its number of outpatient imaging centers swell by 22%, increasing from 297 to 363 as of March. Most are concentrated around the seven core markets of Arizona, California, Delaware, Florida, Maryland, New Jersey, and New York.

Analyst Richa Deval and S&P colleagues said about one-third of centers are held through joint venture partnerships with large health systems. However, “we believe its strategic development plans could expand this percentage to approximately 50% of all centers within the next five years,” they noted. Cash flows have been constrained the last two years, and S&P anticipates that will continue in the two that follow, due to “significant investments” in new facilities.

“Our expectation also includes 4%-5% same-site volume growth, improving labor market trends with declining premium pay and number of open positions, and decreasing losses from its AI (artificial intelligence) segment,” the analysis noted. “However, we believe some level of permanently higher labor costs for staff and radiologists will be somewhat of a margin headwind.”

S&P highlighted several other advantages fueling RadNet’s market position. Those include $500 million in loans with interest rates locked in at around 2%, scale, multi-modality sites offering numerous imaging combinations, and “strong payer diversity.” About 55% of its collections come from commercial plans, 22% from Medicare, and 3% from Medicaid. Another 11% is from Managed care contracts with 33 medical groups in California, covering 2 million lives. Such capitation arrangements pay RadNet a fixed per-member, per month price for providing radiology services. In turn, RadNet bears full utilization risk, with the ability to raise annual rates 1%-3%.

“We are confident in the company’s ability to manage this capitation risk,” the analysis noted. “While margins are slightly lower than fee-for-service revenue, there is little bad debt expense and billing and collection costs.”