Overview
— Fort Myers, Fla.-based oncology services company Radiation Therapy
Services Inc. is refinancing its existing senior secured credit facility in a
leverage neutral transaction. The new structure restricts performance
covenants to the revolving credit facility with only a first-lien secured
leverage test expected.
— We are affirming our ‘B’ corporate credit rating and raising the
outlook to stable from negative, reflecting the elimination of any near-term
covenant or liquidity concerns.
— At the same time, we are assigning a ‘BB-‘ debt rating and a ‘1’
recovery rating to the proposed revolver and a ‘B+’ debt rating and ‘2’
recovery rating to the proposed second-lien notes. These ratings reflect our
expectations of very high (90%-100%) and substantial (70%-90%) recovery on the
revolver and second-lien notes, respectively, in the event of a payment
default. The ‘CCC+’ debt rating and ‘6’ recovery rating on the subordinated
notes remains unchanged.
— Our stable outlook reflects our expectation of approximately 10%
revenue growth, steady EBITDA margins and minimal deleveraging as the company
utilizes cash flow to fund its growth strategy.
Rating Action
On April 24, 2012, Standard & Poor’s Ratings Services affirmed its ‘B’
corporate credit rating on Radiation Therapy Services Inc. and raised the
rating outlook to stable from negative. In addition, we assigned our ‘BB-‘
debt rating and ‘1’ recovery rating to the company’s proposed revolver, and
our ‘B+’ debt rating and ‘2’ recovery rating to the proposed second-lien
notes.
Rationale
The rating on Fort Myers, Fla.-based Radiation Therapy Services Inc. reflects
our assessment of the company’s business risk profile as “weak” and the
financial risk profile as “highly leveraged.” We expect Radiation Therapy to
continue to be subject to significant reimbursement risk such as the recent
Medicare payment cut (8% for IMRT and 22% for IGRT treatments) to radiation
treatment providers for 2012. We expect Radiation Therapy’s total revenue to
increase by approximately 10% for 2012, primarily on the impact of acquisition
activities and continued growth of the company’s Latin American business,
Medical Developers LLC. Our expectations are for EBITDA margins to remain
relatively flat in 2012 over 2011, as cost mitigation strategies are offset by
increases in lower margin multi-specialty practice businesses. We expect any
free operating cash flow to be used to fund acquisitions rather than to repay
debt.
We view Radiation Therapy’s financial risk profile as “highly leveraged”,
reflected in our forecast of adjusted debt to EBITDA of over 6.5x at the end
of 2012, down from 6.9x at year-end 2011, and our expectation of adjusted
funds from operations (FFO) to debt in the high single digits. We do not
expect any shareholder dividends or debt paydown, and expect any discretionary
cash flow (estimated to be approximately $20 million in 2012) will be used to
fund acquisitions. Significant revolver availability along with growth
strategy means the company likely will borrow to finance acquisitions, keeping
leverage high.
We view the company’s business risk as weak; Radiation Therapy operates in the
highly fragmented and competitive radiation therapy (oncology) market, has
geographic and technology concentration, and faces ongoing reimbursement
concerns. It has reduced its dependency on Florida from nearly 50% of global
freestanding revenues in 2008 to 40% in 2011. We note however, that its latest
acquisition and license agreement are both in Florida. The company is
continuing to reposition itself as a multispecialty cancer care organization
(rather than a freestanding radiation oncology model), and is rebranding
itself under the name “SaviaCare.”
Radiation Therapy owns, operates, and manages outpatient radiation oncology
services in its 127 treatment centers in 16 states, with a significant
concentration in Florida and a growing presence in Latin America through its
Medical Developers LLC business. Approximately 45% of Radiation Therapy’s
revenue is derived from government reimbursement, predominantly Medicare. The
uncertainty of federal efforts to reduce health care spending subjects the
company to ongoing federal regulatory risk, as evidenced by the Medicare cuts.
The underlying radiation business is expected to grow at a fairly modest pace
(1% to 3% annually), with the Medicare rate cuts partly offset by improvement
in volumes and in improved commercial reimbursement rates. We believe growth
is going to be primarily derived from acquisition activity.
Liquidity
We believe Radiation Therapy’s liquidity is adequate, revised from less than
adequate. The refinancing will extend maturities into late 2016 for the
revolver and 2017 for the notes, with no amortization and only a first-lien
leverage covenant on the revolver. Relevant aspects of Radiation Therapy’s
liquidity are:
— We expect liquidity sources (consisting primarily of $20 million of
cash on hand, discretionary cash flow of approximately $20 million and
availability under the revolver) to exceed uses by over 2.0x over the next 12
to 24 months;
— We expect liquidity sources to exceed uses, even if EBITDA declines by
20%;
— We believe the company could absorb a high-impact, low probability
event;
— We view the bank facility as covenant-light; the first-lien leverage
test is on the revolver only, which is expected to be held predominantly by
key relationship banks, making any amendments more easily negotiated;
— We estimate the revolver will be utilized to fund acquisitions; and
— In our assessment, the company has well-established bank
relationships; however, sponsor ownership and high debt leverage could hurt
prospective access to capital markets in the future.
Recovery analysis
The rating on the company’s revolving credit facility is ‘BB-‘ (two notches
above the corporate credit rating), and the recovery rating is ‘1’, indicating
our expectation of very high recovery in the event of a payment default. The
rating on the proposed second-lien notes is ‘B+'(one notch above the corporate
credit rating on Radiation Therapy), and the recovery rating is ‘2’,
indicating our expectation that lenders would receive substantial (70%-90%)
recovery in the event of a payment default. The rating on subordinated notes
is ‘CCC+’ (two notches below the corporate credit rating on Radiation
Therapy), and the recovery rating is ‘6’, indicating our expectation that
lenders would receive negligible (0-10%) recovery in the event of a payment
default. (For the complete recovery analysis, please see the recovery report
on Radiation Therapy, to be published following this report on RatingsDirect.)
Outlook
Our stable rating outlook on Radiation Therapy reflects our expectation of
approximately 10% revenue growth, steady EBITDA margins, and minimal debt
paydown as the company uses cash flow to fund its growth strategy. Considering
its weak business risk profile, sponsor ownership, and adjusted debt leverage
well over 5.0x, we do not expect an upgrade in the near to medium term. A
downgrade would most likely be predicated on a large, debt-funded acquisition
limiting revolver availability and liquidity or a decline in EBITDA such that
headroom under its covenants was reduced to below 10%.
Related Criteria And Research
— Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
— 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
Radiation Therapy Services Inc.
Ratings Affirmed; Outlook Action
To From
Corporate Credit Rating B/Stable/– B/Negative/–
