Waystar Technologies sees credit rating upgrade at S&P due to stronger market position

S&P Global Ratings upgraded Waystar Technologies' issuer credit rating to 'BB-' from 'B+' due to its stronger market position and decreasing leverage, with a stable outlook reflecting expectations of continued growth while maintaining leverage below 5x. Concurrently, EQT Partners, Bain Capital, and CPPIB reduced their combined ownership in Waystar from 52% to 43.9% through a public offering, signaling a potential shift in control. The rating agency expects Waystar's debt to EBITDA ratio to decline to 3.2x in 2025, but notes that aggressive M&A activity could quickly raise leverage above 4x, and an upgrade is unlikely due to its relatively small scale and limited track record.

Analysis

S&P Global Ratings has upgraded Waystar Technologies Inc.'s issuer credit rating to 'BB-' from 'B+', with a stable outlook, reflecting the company's strengthened market position within the fragmented revenue cycle management (RCM) sector and a trajectory of decreasing leverage. This upgrade is supported by anticipated low-double digit revenue growth and expectations for Waystar's debt-to-EBITDA ratio to improve to approximately 3.2x in 2025 from 3.6x in 2024, underpinned by an expanding EBITDA base with margins around 38%, leading to projected cash flow exceeding $200 million in 2025. Concurrently, a significant reduction in ownership by key financial sponsors EQT Partners, Bain Capital, and the Canada Pension Plan Investment Board, from 52% to 43.9% via a 14.4 million share public offering, signals a potential shift in control and a future where cash can be netted against debt, further de-leveraging the balance sheet once sponsor control is fully relinquished; EQT has already lost a board seat due to this sale. Waystar's above-average growth relative to peers is attributed to solid pricing dynamics, contract wins, cross-selling, product quality, and high customer retention. However, the rating remains constrained by Waystar's appetite for M&A in a highly fragmented market, which could rapidly increase leverage above 4x, and the company has yet to establish a track record of sustained lower leverage or commit to a public leverage target. While Waystar is positioned to benefit from healthcare IT investment trends, it faces competition from larger players like Epic Systems, Optum, and Oracle Corp., and S&P Global Ratings views a further rating upgrade as unlikely in the near term due to Waystar's relatively small scale, limited track record, and remaining financial-sponsor ownership.

Key Decisions for Investors

• Investors should closely monitor Waystar's M&A strategy and execution, as aggressive deal-making could quickly increase leverage beyond 4x, potentially impacting its credit profile despite the recent 'BB-' upgrade and stable outlook.
• The ongoing reduction of ownership by financial sponsors such as EQT, Bain Capital, and CPPIB, now at 43.9%, can be viewed as a positive long-term catalyst for credit quality, as their eventual exit will allow for cash netting against debt and may foster more conservative financial policies.
• Evaluate Waystar's ability to consistently achieve its projected low-double digit revenue growth and EBITDA margin expansion around 38%, as these are crucial for maintaining the improved leverage metrics and validating the current credit rating, particularly in the face of competition from larger industry players.
• Acknowledge that S&P Global Ratings considers a further credit rating upgrade for Waystar unlikely in the near term due to its current operational scale, limited history of maintaining lower leverage, and the residual influence of financial sponsors, suggesting a potential cap on near-term credit improvement.