S&P Global Ratings downgraded Radiology Partners on Monday amid concerns the imaging industry giant’s capital structure could become unsustainable.

The El Segundo, California-based group has been operating with high leverage and a cash flow deficit, meaning more money is flowing out than in, for the past two years. That’s because practice leaders have remained “aggressive” on acquisitions, credit analysts noted.

Radiology Partners now has some $3.37 billion in obligations, including a revolving credit line becoming current in less than six months and “significant debt maturities looming in July 2025.” It is further constrained by delayed collections, due to the challenging arbitration process under surprise-billing legislation, along with a tight labor market.

“The negative outlook reflects our expectation that cash flow deficits will continue over the next 12 months, further pressuring liquidity, and raises the possibility of an unsustainable capital structure,” analysts Richa Deval and David A. Kaplan wrote June 5. “It also reflects the increasing risk of a debt restructuring or below par repurchase, which we could view as distressed and tantamount to default.” 

S&P has downgraded Rad Partners’ credit rating from B- to CCC+, a “speculative grade” denoting its debts are “currently vulnerable and dependent on favorable business, financial and economic conditions” to meet commitments. As of March 31, the company’s liquidity consists of $70 million in cash on hand and another $105 million remaining on its revolving credit line. Experts believe the funds should be sufficient to cover needs over the next year, including debt amortization, working capital requirements, and tax distributions to shareholders.

But a shrinking cash cushion is leaving little wiggle room for further setbacks, the analysis noted. That’s because a sizable chunk of the practice’s debts are slated to mature by 2025. RP’s obligations now include:

• $335 million drawn from its $405 million revolving credit line, which will "become current" (an accounting principle meaning it will be due for settlement within the next 12 months) in November 2024.
• $1.6 billion in term loans due in July 2025.
• $800 million in secured notes, also due in July 2025.
• $638 million more in unsecured debts (meaning not backed by collateral) owed by July 2028.

Deval and Kaplan anticipate RP may face challenges refinancing these debts at favorable terms, “given prevailing capital market conditions.” Even if leaders are able to, higher interest expenses may create further cash pressures. Experts anticipate the company’s debts to remain at roughly 10 to 10.5 times its adjusted earnings in 2023, falling to below 9.5 by next year.

S&P issued a negative outlook for the foreseeable future, with tightening liquidity, looming maturities and increasing debts upping the risk of potential default.

“That said, we also understand Radiology Partners’ cost saving initiatives, increased focus on organic growth [rather] than acquisitions, continued efforts to manage labor market conditions and ability to increase subsidies from providers, will eventually improve profitability and credit metrics,” analysts noted.

Rad Partners bills itself as the largest radiology practice in the U.S., serving more than 3,250 hospitals and other healthcare facilities. The company has grown rapidly via acquisition over the past seven years, adding 500 physicians and 155 new sites in 2022 alone. As of April, RP employed more than 3,300 radiologists across all 50 states, interpreting 53 million exams annually.

Former DaVita executive Rich Whitney, MBA, co-founded Rad Partners in 2012. It is supported by private equity firm Whistler Capital (31.6% ownership stake as of November)—alongside venture capital firm New Enterprise Associates (19.6%) and the Australian sovereign wealth Future Fund (10%). S&P said its downgrade also reflects RP’s corporate decision-making, which “prioritizes the interests of the controlling owners, in line with our view of the majority of rated entities owned by private-equity sponsors.” It also denoted PE’s “generally finite holding periods” for such companies, with a “focus on maximizing shareholder returns.”

In a statement issued June 7, a Rad Partners spokesperson said the company remains "financially strong with sufficient liquidity" and year-over-year growth in its earnings (before interest, taxes, depreciation and amortization). 

"Notwithstanding the economic and policy headwinds that radiology practices face and must be addressed, we remain committed to adapting to the current environment by reducing debt and strengthening our balance sheet through organic EBITDA growth," the spokesperson told Radiology Business. "We are also encouraged that payers recognize their economics in [the No Surprises Act] are unfavorable and are coming back in-network,” the statement added, echoing a point made in the S&P analysis. 

Editor's note: This story has been updated to clarify the due date of RP's revolving credit line and add a comment from the company.