TEXT-S&P rates RadNet secured credit facility 'B+'
Sept. 18 - Overview
-- U.S.-based outpatient diagnostic imaging services provider RadNet is refinancing its credit facility.
-- We are assigning a 'B+' debt rating and '2' recovery rating to the company's $437.5 million senior secured credit facility; the corporate credit rating and senior unsecured debt rating are affirmed.
-- Our stable rating outlook reflects our expectation that debt to EBITDA will decline to around 5.5x in the near term. Rating Action On Sept. 18, 2012, Standard & Poor's Ratings Services assigned RadNet Management Inc.'s $437.5 million senior secured credit facility its issue-level rating of 'B+' (one notch higher than the 'B' corporate credit rating on the company) with a recovery rating of '2', indicating our expectation of substantial (70% to 90%) recovery for lenders in the event of a payment default. Existing ratings on the company, including the 'B' corporate credit rating, were affirmed. We believe that the new term loan will repay a portion of the outstanding revolver balance, and that the increase in incremental debt outstanding will be minimal. Rationale The ratings on Los Angeles-based RadNet Management Inc., the wholly owned operating subsidiary of RadNet Inc., reflect its "weak" business risk profile and "highly leveraged" financial risk profile, according to Standard & Poor's Ratings Services' criteria. RadNet operates in a fragmented and highly competitive industry that has been hurt by the weak U.S. economy, and faces reimbursement risk. To diversify its revenue base, RadNet expanded into ancillary businesses; they do not yet materially contribute to product diversity or EBITDA. The "highly leveraged" financial profile has been stretched by acquisitions; adjusted debt leverage was 5.7x for the 12 months ended June 30, 2012. RadNet has considerable dependence (in California) on an affiliated entity, Beverly Radiology Medical Group III (BRMG), for its professional staffing, and partnership arrangements with other ancillary businesses that are owned by BRMG, such as Breastlink Medical Group. The CEO of RadNet Inc. owns about 14% and 99% of RadNet and BRMG, respectively. Because of the interdependence and common ownership among RadNet, RadNet Inc., and BRMG, we view them as a consolidated entity. While second-quarter 2012 revenues grew 12% over the 2011 period, all of the growth was from acquisitions. Same-store revenues declined 2.6%, reflecting pricing pressures. Same-store volume increased 0.8% in the second quarter, slower than the prior several quarters, reflecting contracting industry-wide demand; the recession dampened demand for discretionary medical procedures and attendant diagnostic scans over the past few years. Beyond 2012, we project revenue growth in the mid-single digits, reflecting only modest organic growth, market share gains, and acquisitions, despite industry contraction driven by lower hospital census, fewer physician visits, and radiology benefit managers (that question the need for or deny reimbursement of imaging scans). Revenues in 2012 will benefit (by about $70 million) from the recent, and more significant, acquisition of 21 imaging facilities from CML HealthCare Inc. If adopted, the EBITDA impact of proposed Medicare reimbursement cuts for 2013 (estimated at $5 million to $6 million) should be offset by reimbursement increases negotiated with two large commercial payors and operational efficiencies such as voice recognition software, expected to be implemented systemwide by year-end 2012. EBITDA margins, which weakened in 2011 (after the acquisition of ancillary business not yet contributing to the bottom line), and further in the first half of 2012, could fall by about 100 basis points in 2012 over 2011 as a result of the CML acquisition. Subsequently, we expect EBITDA margins to rebound in 2013 as rationalization of, and synergies garnered with, CML are realized. Despite the recent margin compression, second-quarter 2012 EBITDA increased 3% over the 2011 period. We believe EBITDA growth will reduce adjusted debt leverage to about 5.5x by year-end 2012. As of June 30, 2012, RadNet operated 237 diagnostic imaging centers in seven states, primarily California and the east coast. Its growth strategy relies heavily on acquisitions, which have contributed meaningfully to its growth over the years. In November 2011, RadNet acquired the majority of CML for about $38 million, increasing its Maryland and Delaware presence from 61 to 77 centers, and giving it a new platform in Rhode Island. A single business focus is incorporated into RadNet's "weak" business risk profile, as well as high capital intensity and relatively low barriers to entry. While RadNet is subject to variable fees from third-party payors, its concentration in certain geographies improves its negotiating power with private insurers. Medicare exposure, at about 20% of revenues, is manageable. Capitated managed care contracts (15% of revenues) provide revenue stability, albeit with relatively low margins. Although the diagnostic imaging sector has performed worse than the aggregate health care industry, RadNet appears to be taking market share. The majority of sites offer multimodality imaging services, a key point of differentiation from competitors. Over the longer term, organic demand should increase because of the aging population and the benefits of imaging itself, aiding the diagnosis of an increasing variety of diseases. RadNet has been acquisitive, contributing to the "highly leveraged" financial risk profile. Acquisition spending totaled $41 million for the 12 months ended June 30, 2012, requiring RadNet to draw on its revolving credit facility; $60 million was outstanding on the revolver at June 30, 2012. While ongoing debt-financed acquisitions provided growth opportunities, they contributed to sustained aggressive debt leverage. Liquidity RadNet generates sufficient cash to cover ongoing capital expenditures. We expect EBITDA to expand based on our base case forecast. We project working capital and cash from operations to steadily improve over the remainder of 2012 as delayed receivables (from prior reimbursement negotiations) are collected, and CML operations are integrated; funds from operations should exceed $75 million in 2012. We believe that the new credit facility will expand RadNet's liquidity. Thus, we are revising our view on the company's liquidity to "adequate" from "less than adequate" liquidity. Our view of the company's liquidity profile incorporates the following:
-- We expect liquidity sources to exceed uses by 1.2x over the next year.
-- We expect liquidity sources to exceed uses over the next year, even if EBITDA declines by 50%.
-- We believe RadNet would not breach its covenants if revenue declines by 15%.
-- However, we believe RadNet might not be able to absorb a high-impact, low-probability.
-- We believe the company has well-established bank relationships. RadNet maintains a negligible cash balance, but has historically generated cash from operations well in excess of its capital needs, supplementing internally generated cash with revolver drawdowns to fund acquisitions. Cash flow benefits from net operating loss carry forwards; we believe RadNet will not be a taxpayer for the foreseeable future. Cash from operations was $77 million for the 12 months ended June 30, 2012, an improvement over $58 million for 2011, driven by a $17 million positive swing in account receivables. This reflects the reversal of a delay in payment from private payors as RadNet negotiated a bundled reimbursement code for PET/CT scans of the abdomen and pelvis, and to a lesser degree, the incorporation of acquisitions. At June 30, 2012, RadNet had $60 million outstanding on its $100 million revolving credit facility. Recovery analysis The company's $437.5 million senior secured credit facility consists of a $107.5 million, five-year senior secured revolving credit facility and a $330 million, six-year senior secured term loan. (See Standard & Poor's recovery report on RadNet to be published shortly after this report on RatingsDirect.) Outlook Our stable rating outlook on RadNet reflects our expectation that debt to EBITDA will decline to around 5.5x in the near term. RadNet has historically supplemented internally generated cash with revolver drawdowns to fund ongoing acquisitions. While multiples paid for acquisitions have typically been under 5x, they have often involved the assumption of fixed-site operating leases. As a result, adjusted debt leverage has ranged between 5.5x and 6.0x for the past several years. We could raise our ratings if RadNet sustains debt leverage at 4.5x to 5x, and we believe that it will maintain a covenant cushion of at least 15%. Alternatively, we could consider lowering our ratings if business risks escalated, resulting in eroding EBITDA and higher debt leverage. However, we believe the more likely trigger for a downgrade would be weakening liquidity caused by debt-financed acquisitions and tightening bank loan covenant cushions. However, we think this scenario is very unlikely to occur within a one-year time frame. Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed RadNet Management Inc. Corporate Credit Rating B/Stable/-- RadNet Management Inc. Senior Secured B+
Recovery Rating 2 Senior Unsecured CCC+
Recovery Rating 6 New Rating RadNet Management Inc. $330M first-lien term ln due 2018 B+
Recovery Rating 2 $107.5M first-lien revolver due 2017 B+
Recovery Rating 2 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Primary Credit Analyst: Cheryl E Richer, New York (1) 212-438-2084;
firstname.lastname@example.org Secondary Contact: David P Peknay, New York (1) 212-438-7852;
- Exclusive: Secret contract tied NSA and security industry pioneer |
- Housing, jobs data weaken, but overall economic picture still upbeat
- Putin critic Khodorkovsky in Germany after pardon |
- Target probe looks overseas, stolen cards offered online
- Pizza outlet attacked as India, U.S. fail to cool diplomat row |