Apr 24, 2023

Standard & Poor’s downgraded radiology vendor Zotec Partners on Friday after losing its biggest customer. The Carmel, Indiana-based revenue cycle management provider holds some $307 million in term loans that are due within 12 months. Zotec Partners has previously tried to restructure its obligations but has been unable to, facing “significant refinancing risk due to current market conditions and upcoming debt maturities.” “We expect the company to improve on 2022 performance,” S&P analysts Andrew Manuel and Vishal H. Merani wrote April 21 . “Although we expect the loss of their largest customer, Optum, will drive a revenue decline in 2023, we expect the combination of some new contract wins coupled with operational strategic initiatives to realign its cost structure [and] will result in much better margins.” Experts estimate that Zotec will face a roughly 13% revenue decline after the end of its relationship with the UnitedHealth subsidiary. However, the company is expected to log favorable earnings margins of 20%-25%, up from 15% last year (excluding any adjustments from the Optum contract termination). The company has logged solid organic growth, with “strong bookings momentum” in 2022. Increased focus on multispecialty groups, automation, and same-store growth also help offset some of these pressures. Along with a tight debt market, S&P experts cautioned that Zotec’s concentration in radiology and emergency medicine exposes the vendor to reimbursement pressures hitting the two specialties. CMS decreased overall radiology rates in Medicare by about 2% this year, “affecting a substantial percentage of company revenue.” “The negative outlook reflects the risk that the company does not refinance or completes a distressed exchange or restructuring ahead of the 2024 maturity,” analysts noted. “We could lower the rating if a default or distressed exchange appeared to be inevitable within six months, absent unanticipated significantly favorable change in the issuer's circumstances.” S&P plans to take positive action if Zotec successfully refinances its loans in the next year. Analysts also cautioned that the company is impacted by “very negative” governance factors, including its family-controlled ownership, a board structure that lacks any independent members, and “aggressive” shareholder distributions. Zotec Partners did not immediately respond to Radiology Business requests for comment on Friday and Monday. The company was in the news in 2021 after exchanging lawsuits with radiology practices around alleged issues with its billing software. Previous coverage of Zotec Partners: