Financing Growth in a Changing Imaging Environment

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Practices, imaging centers, and hospital radiology departments continue to keep an eye on expanding their service lines and market reach. In part, this expansion is an effort to counteract the negative effects of declining reimbursements while meeting demands to provide better care. Mergers and acquisitions, as well as the procurement of equipment, are the catalysts for such growth—and players are looking at myriad ways to finance their endeavors. Joseph White, MBA, is a principal with CliftonLarsonAllen, an accounting and financial advisory company with operations in 13 states. He says that hospitals currently enjoy a tremendous ability to raise capital, assuming that their cash on hand and profit margins are good. In addition to bank debt, for-profit institutions have the option of tapping into the bond market or issuing stock. Interest paid by hospitals on bonds issued to procure capital is contingent upon the bond rating assigned them by Moody’s Investors Service and Standard & Poor’s. For example, White reports, hospitals with the best (AA) rating can now finance projects via 30-year bonds at the extremely low interest rate of about 4%. For hospitals with poor ratings, interest rates can approach the 8% mark. White adds that one key advantage of issuing bonds (rather than stock) is that the interest on bonds is tax deductible. Dividends on stock do not qualify for such deductions. It’s just as significant that while stockholders are given ownership status in the institution and benefit from it financially, bondholders do not have such status—meaning a lesser degree of control for them. Moreover, White says, just as banks have relaxed their criteria on the mortgage side of lending, they are viewing hospitals’ loan requests more favorably. He explains, “They aren’t retaining capital as much as they were before and have built up reserves. It’s not as easy as it once was to secure a bank loan, but it’s easier now than it was a year ago or six months ago. This is a positive thing.” He notes that in determining whether to grant financing to imaging centers with partial hospital ownership, to their independently owned counterparts, or to radiology practices, banks carefully evaluate the entity’s market dominance, whether it is exhibiting any growth or has viable growth potential, and the solidity of its management. Current compensation levels are also assessed. “With radiology groups, the issue of high physician compensation comes into play; banks like to see that there is flexibility to reduce compensation so as to make the debt payments,” White says. “Smaller groups may be asked for personal guarantees by their partners.” The Private-equity Path Mark Stolper, executive vice president and CFO of RadNet, Inc, corroborates White’s comments on bank financing for imaging centers and radiology groups, observing that local banks with which operators already have relationships are becoming amenable to granting financing. “I would venture to say, though, that floating stock—while fine for hospitals—is not an option for 99.99% of imaging-center chains,” he says, despite some having probably contemplated it briefly. He adds, “To go public, you need north of $100 million in annual sales.” RadNet has 237 owned or operated freestanding imaging centers, including 23 joint ventures. It has typically executed acquisitions using $25 million to $40 million in cash flow per year, but it also has a revolving credit line totaling $121 million. “We are somewhat unusual in that we have such a substantial credit line, but because it is a less expensive way to go in the long run, we always look to cash reserves first when making an acquisition,” Stolper says. For its part, CDI has successfully accessed bank debt multiple times to meet financing needs, according to Robert Baumgartner, CEO of the newly merged company. The imaging-center chain recently followed another approach, however, harnessing private-equity capital in its merger with Insight Imaging. As a result of the merger, the combined company maintains a footprint of 116 fixed imaging centers (in 25 states) and 90 mobile MRI and PET/CT units. CDI partnered with Black Diamond Capital Management, LLC, an alternative asset-management company with more than $11 billion in assets under management across four investment platforms, including private-equity funds. Black Diamond (through funds that it manages that collectively own a majority interest in Insight Imaging) led an investment