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Radiology Partners, Inc. -- Moody's affirms Radiology Partners' Caa1 CFR; outlook changed to positive

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Rating Action: Moody's affirms Radiology Partners' Caa1 CFR; outlook changed to positive

Global Credit Research - 03 Dec 2020

New York, December 03, 2020 -- Moody's Investors Service ("Moody's") affirmed Radiology Partners, Inc's ("Radiology Partners") Caa1 Corporate Family Rating (CFR), Caa1-PD Probability of Default Rating (PDR), B3 first lien senior secured rating and Caa3 rating on the company's senior unsecured notes. The outlook was changed to positive from stable.

Concurrently, Moody's assigned a B3 rating to the company's proposed $650 million senior secured notes. The proceeds of this notes offering, along with $150 million in new cash equity and $129 million of cash will be used to finance the acquisition of MEDNAX Radiology Solutions and pay transaction fees/expenses.

The rating affirmation reflects the company's very high leverage and significant execution risk in integrating MEDNAX Radiology Solutions, which will increase the company's revenues by up to 40%. Moody's estimates that the company's adjusted debt/EBITDA was around 9.0 times for the last twelve months ended September 30, 2020, including an add-back for lost earnings due to the pandemic. Moody's expects that leverage will improve, but remain high, with pro forma debt/EBITDA, including MEDNAX Radiology Solution, in the 7.5-8.0 times range in 2021. Achieving this level of deleveraging, however, remains uncertain given the execution and governance risks associated with the integration of MEDNAX Radiology Solutions and ongoing social risks associated with the coronavirus pandemic.

The change of outlook to positive reflects a significant recovery in patient volumes in recent months following very steep declines in the second quarter of 2020 triggered by the coronavirus pandemic. The positive outlook also reflects the company's materially expanded scale and geographic diversity after completing the acquisition of the radiology business from MEDNAX, Inc.

A summary of all affected ratings is as follows:

Ratings affirmed:

Radiology Partners, Inc.

Corporate Family Rating at Caa1

Probability of Default Rating at Caa1-PD

$300 million senior secured first lien revolving credit facility expiring 2024 at B3 (LGD3)

$1.4 billion senior secured first lien term loan due 2025 at B3 (LGD3)

$710 million unsecured notes due 2028 at Caa3 (LGD5)

Ratings Assigned:

Radiology Partners, Inc.

Proposed $650 million secured notes due 2025 at B3 (LGD3)

Outlook Actions:

The outlook was changed to positive from stable

RATINGS RATIONALE

The Caa1 Corporate Family Rating reflects Radiology Partners' very high financial leverage and significant execution risk in integrating MEDNAX Radiology Solutions. The company has increased its revenue by around 10-fold over the last five years through acquisitions. The company will further increase its revenue by up to ~40% when the MEDNAX Radiology Solutions acquisition is completed. This extremely rapid pace of growth carries significant risk, including systems integration, financial reporting, and people alignment.

Radiology Partner's liquidity is good, supported by $102 million in cash and a $300 million revolving credit facility which will be undrawn following the proposed transaction. Absent acquisitions and related integration and transaction costs, Moody's believes that Radiology Partners has the potential to generate over $100 million of free cash flow. However, Moody's expects the company to remain acquisitive and significant transaction and business integration costs associated with the MEDNAX transaction will further constrain free cash flow over the next 12-18 months.

The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of the corporate assets from the current weak U.S. economic activity and a gradual recovery for the coming months. Although economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around Moody's forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

Radiology is a sector of healthcare that has social risk given that radiology services can give rise to surprise medical bills, which are currently an area of intensive political focus. That said, Moody's believes that the company's direct exposure to potential surprise medical bill legislation is limited given Radiology Partners has a limited number of medical claims that are both out-of-network and balance billed to patients. However, the company remains exposed to pricing pressure as an indirect result of some surprise medical bill proposals that would use median in-network rates as a benchmark.

In terms of governance, the company is ~61% owned by three private equity investors. The company's financial policies are expected to remain aggressive reflecting its majority control by a private equity investor. However, since physicians also own a significant proportion of the company, they will also have a material influence in deciding the company's policies. Over time, Radiology Partners may need to provide liquidity to doctors as they retire which raises the risk of cash outflows.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be downgraded if the company's liquidity and/or operating performance deteriorates, it fails to effectively integrate acquired practices including the MEDNAX Radiology Solutions acquisition, or if its financial policies become more aggressive.

Ratings could be upgraded if Radiology Partners smoothly integrates MEDNAX Radiology Solutions and other acquired practices. Additionally, Moody's would consider an upgrade if the company's adjusted debt/EBITDA is sustained below 7.5 times and the company demonstrates the ability to sustainably generate positive free cash flow.

Headquartered in El Segundo, CA, Radiology Partners is one of the largest physician-led and physician-owned radiology practices in the U.S. Services provided include diagnostic and interventional radiology. The company is 20.1% owned by New Enterprise Associates, 10.3% by Future Fund, 32.4% by Starr and the rest by physicians, management and other investors. Pro forma revenues including the recent MEDNAX Radiology Solutions acquisition are approximately $1.9 billion.

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kailash Chhaya, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Jessica Gladstone, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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