Radiology Partners’ recent restructuring actions reduced the company’s debt by about 20% or $600 million, according to a new analysis from Moody’s published Tuesday.
That would leave RP’s current obligations at about $2.4 billion, with debt maturities now extended by several years. Analysts estimate that Rad Partners’ debt-to-earnings (before interest, taxes, depreciation and amortization) ratio will fall to 8x after restructuring, down from 9.6x as of Sept. 30.
“Moody's views the restructuring as a distressed exchange and hence a limited default because the conversion of some interest payments to pay-in-kind represents an economic loss to the term loan and noteholders,” Adam Chaim and Ola Hannoun-Costa wrote Feb. 27. “Additionally, the restructuring will subordinate nonparticipating lenders and noteholders. As a result, Moody's views the restructuring as a limited default under Moody's definition.”
“Payment in kind” refers to a type of debt vehicle where interest is paid in additional bonds rather than cash during an initial period. Moody’s said RP’s total interest expenses remain unchanged after the restructuring. But the company will utilize payment-in-kind on its new term loan and bonds for at least the first 15 months. The new senior secured, pay-in-kind notes carry an interest rate of 10.25% and are due in 2030.
“The PIK/cash split will be dependent on Radiology Partners achieving certain trailing 12-month cash EBITDA hurdles,” analysts noted. “This feature is beneficial as it matches cash interest payments with the company's ability to pay. Moody's expects more than $120 million of free cash flow in 2024 and further growth in 2025 with both years reflecting approximately $110 million of PIK interest.”
Moody’s expects Rad Partners to have about $100 million in cash on hand and the full limit on its new $390 million revolving credit line. Amid the improved liquidity picture, the agency is predicting RP’s debt-to-earnings ratio could fall below 7x within the next 18 months.
Chaim and Hannoun-Costa upgraded the company’s overall corporate rating from Caa3 to Caa1 (both signify debts “of poor standing” that are “subject to very high credit risk”), noting its high leverage and solid liquidity.
“The rating also reflects risks tied to the company's aggressive growth strategy, which Moody's views as the primary factor that led to the restructuring,” analysts noted. “The rating is also constrained by ongoing risks tied to working capital pressure from the No Surprises Act, including uncertainty surrounding timing of receivables collection from out-of-network payers. The rating is supported by Radiology Partners' position in a fragmented industry as the largest radiology practice in the U.S., diversification by geography and customer type, stable business prospects, and favorable payer mix.”
Based in El Segundo, California, Rad Partners employs over 3,700 physicians servicing 3,260 hospitals in all 50 states. Prior to raising $720 million in new equity, the company was 19.6% owned by venture capital firm New Enterprise Associates, 10% by Future Fund, and 31.6% by private equity firm Whistler Capital Partners. Physicians, management and other investors held the balance, with RP logging annual revenues of $2.9 billion. RP has not responded to requests for an updated, post-transaction ownership breakdown.
The company issued the following statement in response to Moody's analysis:
“With our comprehensive financing transactions complete, we now have the additional resources and flexibility to continue to expand our clinical services and extend our technology and AI capabilities. Today we are an even stronger practice, well-positioned to continue transforming radiology for the benefit of our patients, hospital partners and physicians.”
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.