S&P plans to reclassify Radiology Partners’ debt as ‘distressed’
S&P Global Ratings said Friday it plans to reclassify industry giant Radiology Partners’ debt as “distressed.”
The decision comes one week after the country’s largest radiology group announced it was undertaking a comprehensive set of financial transactions to improve its circumstances. Rad Partners is working to raise $300 million in preferred equity to bolster its finances and flexibility, also shifting debt due dates from 2024 to 2028 and 2025 to 2029.
New York-based S&P highlighted the proposed swapping of Rad Partners’ senior unsecured notes (due in 2028) for new second lien notes (due in 2030) as a distressed debt exchange. They also downgraded the rating on these notes to “CC,” indicating the obligations are “highly vulnerable” to nonpayment, with default “expected to be a virtual certainty.”
“The proposed unsecured note exchange, if completed, would reduce the company's cash interest burden and extend its debt maturities,” credit analysts Richa Deval and David A. Kaplan wrote Jan. 26. “However, we do not view the incremental compensation offered to unsecured debt lenders as adequate relative to what was originally promised.”
Radiology Partners also is proposing to switch these unsecured notes—not backed by collateral, with a balance of $638 million as of June—to interest “payment in kind.” This refers to a type of debt vehicle where interest is paid in additional bonds rather than cash during an initial period. Upon completion of the transaction, S&P plans to downgrade the rating on these notes to “D,” indicating a “breach of an imputed promise.”
Meanwhile, Deval and Kaplan said the CCC+ rating on Rad Partners’ secured debt is unchanged and remains on CreditWatch with “negative implications.” They could still lower the rating on these notes, too, if “if we conclude lenders of the respective obligations won't receive sufficient compensation for the maturity extension.”
“If we conclude that, following Radiology Partners' preferred equity raise and finalization of the transaction terms, the lenders on the various secured debt obligations would receive adequate compensation, we expect to leave those ratings unchanged and lower the issuer credit rating to 'SD' (selective default) to reflect a default on only a portion of its debt capital structure,” they wrote.
A Rad Partners spokesperson issued a brief statement Friday, calling the ratings action “expected” while noting that RP has “broad support from our lenders.”
“While we respect the ratings agencies roles and process, our focus is on our physicians, shareholders and lenders, as well as our ratings following the closing of these transactions,” the statement said. “At such time, RP will be very well-positioned for our next phase of growth, with debt maturities extending into 2028-2030, strong liquidity and the capital necessary to continue aggressively investing in our business. We remain resolute in our mission to transform radiology and are excited about strengthening our financial position.”
Rad Partners has faced a series of recent challenges, including a heavy debt load, revenue streams impacted by the No Surprises Act, a dispute with UnitedHealthcare, and wage inflation. Such issues have placed pressure on liquidity, with RP running cash flow deficits the past two years.
“We expect the capital raise and extension of maturities to alleviate near-term liquidity shortfalls, which will give the company time to resolve the working capital shortfalls, address operational challenges, and start reaping benefits from investment in new sites and cost-saving initiatives,” the analysis noted.
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.