S&P Global Ratings expects Radiology Partners to generate positive free cash flow for the first time in years, allowing for a “stable” near-term outlook.
The country’s largest radiology practice last month scored $720 million in new preferred equity, granting it financial flexibility amid recent challenges. Rad Partners also completed several refinancing transactions, extending maturities on $2.8 billion of secured debt to 2028 and 2029 (from 2024 and 2025).
These maneuvers have “significantly improved liquidity,” analysts noted, with RP now having $390 million available from its recently paid off revolving credit line. Rad Partners had recorded negative cash flow in 2022 and 2023, spending more than it was taking in both years, but it appears to be turning a corner.
“The stable outlook reflects our expectation that the company will improve its free cash flow generation to cover its entire interest burden within the next 12-18 months,” analysts Richa Deval and David A. Kaplan wrote March 1. “This is supported by our expectation for healthy revenue growth and liquidity, and at least moderate success with the company's margin improvement initiatives.”
S&P is upgrading its issuer credit rating to “B-” from SD (denoting a selective default). The former indicates a borrower who is still vulnerable to adverse business conditions, but one who “currently has the capacity to meet financial commitments.”
Along with the credit line, Rad Partners’ new capital structure consists of a $1.51 billion secured term loan, $716 million of secured notes, $659 million of second-lien notes, and $32 million more in unsecured notes (not backed by collateral). Under its repayment plan, a small portion of interest on the term loan and secured notes are “pay in kind” for the first 15 months. Such financial instruments have the borrower paying interest with additional securities or equities, rather than cash. All interest on the second lien and unsecured debt also have a pay-in-kind option for 2024 and 2025, along with a provision for continued use of this feature afterward, “depending on financial performance.”
Deval and Kaplan expect RP’s debt-to-earnings ratio to fall to 8x in 2024, down from 11x in 2023. The previous two years, the practice grappled with challenges including delays in collecting receivables stemming from the No Surprises Act. Some insurers have terminated agreements with RP to push claims out of network and lower reimbursement amounts, analysts noted. Currently, about 96% of RP’s bills are in-network (down from 98% previously), and the practice has won more than 90% of cases referred for the independent dispute resolution process.
But IDR remains backlogged, significantly delaying collections.
“Moreover, the IDR process was paused in the fourth quarter of 2023, which resulted [in] further increased receivables impacting liquidity,” S&P experts wrote. “We expect the process to remain slow and continue to be a drag on collections though 2024.”
Rad Partners also is navigating a dispute with insurance giant UnitedHealthcare. Back in October, a judge ruled the payer had to pony up nearly $154 million to the practice. But UHC continues to fight the judgement, and S&P does not foresee payment anytime soon.
Government reimbursement reductions also have impacted Rad Partners, the analysis noted. The 2024 Medicare Physician Fee Schedule included a roughly 3.7% overall decrease in radiology rates. RP generates about 32% of its revenues, or $1 billion annually, from government payers. But the company expects to mitigate the impact through “client revenue increases” and cost-saving initiatives, with the rate change only reducing earnings by about $10 million.
Radiology Partners employs more than 3,600 physicians who service 3,300 hospitals and outpatient facilities across all 50 states. Prior to the equity raise, physicians owned about 33% of the company, with private equity firm Whistler Capital, venture capital group New Enterprise Associates and the Australian sovereign wealth Future Fund holding the balance. The company generated about $3 billion last year in revenues, according to the ratings agency.
S&P issued another analysis about Rad Partners’ recent restructuring moves on Feb. 26, labeling them as “tantamount to a default.”
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.