Radiology Partners constrained by high interest expenses, low cash-flow generation: S&P
Industry giant Radiology Partners continues to be constrained by high interest expenses and low-cash flow generation, according to S&P Global Ratings.
The declaration comes over one year after the country’s largest radiology group undertook a series of transactions to strengthen its financial picture. S&P analysts noted Friday that Rad Partners generated positive free cash flow in 2024—taking in more money than it spent—after running deficits in 2022 and 2023.
“Our ‘B-’ rating and stable outlook on Radiology Partners Holdings LLC are unchanged, constrained by still-high interest expense and low, albeit modestly positive, cash flow generation,” credit analysts Sarah Kahn and Tulip Lim wrote June 20.
The analysis comes in response to a proposed $1.5 billion term loan for RP, due in 2032, along with $800 million in secured notes and a $390 million revolving credit line. S&P expects Rad Partners will use the proceeds to repay its existing $1.5 billion term loan and first-lien secured notes, due in 2029. RP’s new $390 million loan will replace existing revolving credit and improve the chances creditors will recover the senior-secured debts from 50% to 55%.
Kahn and Lim issued a “recovery rating” of 3 for the loan on a six-point scale with 6 representing the lowest possible chances of recovery. This denotes “an expectation of meaningful recovery in the event of default,” with an anticipated reclamation range of 50% to 70%.
This transaction means that Rad Partners will pay interest on its first-lien debt fully in cash—replacing existing loans that have a “payment in kind” feature. Such financial instruments have the borrower paying interest with additional securities or equities, rather than cash. The new capital structure will also lower debt amortization (reducing the time it takes to pay off a loan).
“Although we expect the additional cash interest to hinder cash flow, we estimate the company has the ability to absorb it and continue to produce cash flow,” S&P analysts noted. “In addition, the removal of the [payment in kind] feature on the first-lien debt will limit the loan balance accumulation. However, the second-lien senior secured notes will continue to have a PIK feature.”
Rad Partners was able to generate positive free cash flow in 2024 with the help of this payment-in-kind option, S&P noted. The ratings agency expects RP to generate “sufficient” cash flow this year to cover its entire interest burden (including PIK interest). However, RP will not reach an earnings (before interest, taxes, depreciation and amortization) trigger that would cause the PIK interest to turn into cash pay. Analysts also do not believe Rad Partners annual discretionary cash flow—“burdened with PIK interest payments and noncontrolling interest distributions”—will rise above 2.5% of debt this year or next.
S&P Global Ratings’ simulation model predicts that Rad Partners could face the risk of a loan default by 2027. At the time, the agency estimates the radiology group would be logging earnings of approximately $301 million. This simulation assumes RP’s revolving credit line would be 85% drawn at the time of default.
“Given the continued demand for its services, we believe Radiology Partners would remain a viable business and would therefore reorganize rather than liquidate following a hypothetical payment default,” analysts noted. “Consequently, we used an enterprise value methodology to evaluate recovery prospects.”
Kahn and Lim estimate a net enterprise value of the company (after 5% administrative costs) of about $1.6 billion. The figure is calculated using a 5.5x multiple of projected EBITDA at default, “which is consistent with the multiple used for similar healthcare services companies.” Collateral value available to creditors would be approximately $1.6 billion, with secured, first-lien debts of about $2.7 billion.
Founded in 2012, Radiology Partners is backed by private equity firm Whistler Capital and venture capital group New Enterprise Associates. It employs approximately 4,000 physicians, servicing 3,400-plus sites (including 131 imaging centers) across all 50 states, and handling a total of 56 million cases annually.
RP shared a statement in response to the ratings action on Tuesday.
“Updated credit ratings from both S&P and Moody’s mark important milestones in Radiology Partners’ ongoing strategy to strengthen our balance sheet and position the practice for long-term success," a representative told Radiology Business. "Over the past 18 months, RP has made significant progress—reducing our leverage by 2x from peak levels, extending our maturities and raising one of the largest healthcare equity rounds in recent years. Our debt has now outperformed benchmark indices for three consecutive quarters, reflecting confidence in both our operational performance and the strength of our underlying business model. With a simplified capital structure and greater financial flexibility, we remain focused on transforming radiology through clinical partnerships, continued growth, investment in technology and delivering high-quality care to patients nationwide.”
Editor's note: This story has been update to include a statement from RP.
Marty Stempniak has covered healthcare since 2012, with his byline appearing in the American Hospital Association's member magazine, Modern Healthcare and McKnight's. Prior to that, he wrote about village government and local business for his hometown newspaper in Oak Park, Illinois. He won a Peter Lisagor and Gold EXCEL awards in 2017 for his coverage of the opioid epidemic.