S&P downgrades MedQuest

Standard & Poor's said it lowered MedQuest Inc.'s corporate credit rating to B- from B and secured bank loan to B from B+ and MQ Associates Inc.'s senior unsecured debt rating to CCC from CCC+. The outlook is negative.

The downgrade reflects the increasing probability that Medicare reimbursement cuts mandated by the Deficit Reduction Act of 2005 will affect the company following the legislation's implementation on Jan. 1, 2007, the agency said. Reimbursement under Medicare represented 19% of the company's 2005 net revenue. In addition, the potential exists for subsequent reimbursement pressures from private payors.

S&P said further weakening of the company's already leveraged capital structure is a particular concern given a bank loan debt leverage test that becomes more restrictive through 2007. Also, $136 million of MQ Associates' 12¼% senior discount notes become cash payable in February 2009.

The ratings on MedQuest reflect the highly fragmented and competitive nature of the diagnostic imaging industry, reimbursement risk and an aggressive capital structure. The agency said that while the long-term environment for diagnostic scans remains attractive, any favorable prospect is overshadowed by equipment overcapacity.

Debt to EBITDA, adjusted for operating leases, was 6.8x for 2005.

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