���������ֳ�

���������ֳ� - New York - 30 Apr 2025: ���������ֳ� has assigned a 'AA-' rating to the Massachusetts Development Finance Agency's $46.5 million revenue bond, Cape Cod Healthcare (CCHC) Obligated Group Issue, series 2025.

The Rating Outlook is Stable.

The bond was privately placed in February 2025.

The 'AA-' rating is supported by CCHC's strong financial profile, which reflects the healthcare system's favorable adjusted leverage metrics under ���������ֳ�'s forward-looking base and stress case scenarios. CCHC's solid financial profile stems from a robust balance sheet marked by ample liquidity and very low indebtedness. In addition, the system's dominant market share in the Cape Cod service area, sizeable investments in specialty service lines such as cancer care and cardiovascular surgery, and extensive prior history of strong operating results support the current rating.

CCHC's rating is constrained to the lower end of the 'AA' category due to its high aggregate exposure to governmental payors, limitation to a single geographic market, local demographics, and partial dependence on seasonal tourism for maintaining patient volumes. Over the past four fiscal years, CCHC's operating performance has weakened compared to prior trends, partly due to sector-wide challenges like high inflation and labor force pressures, along with CCHC's payment of a large one-time charge in fiscal 2024 that resulted in an operating loss. ���������ֳ� anticipates that CCHC's operating EBITDA margins will return to the 6% to 7% range over the next two to three fiscal years based on growing patient volumes and expense reduction efforts.

���������ֳ�'s analysis factors in CCHC's new 64-bed patient tower, the Barbey Pavilion, which will open in late May 2025, and recent upgrades to other areas of the hospital. These efforts were funded using a combination of internal cash flow and philanthropy, and the $46.5 million in new debt associated with this series 2025 private placement bond. The pavilion project is expected to finish on time and below budget with a total cost of $200 million. ���������ֳ� believes CCHC has sufficient balance sheet capacity to fund routine capital spending and absorb modest near-term operating results while maintaining the 'AA-' rating.

SECURITY

Debt payments are secured by a pledge of the gross receipts and mortgages on the property and equipment of the CCHC obligated group (OG), which consists of Cape Cod Hospital, Falmouth Hospital, and the Cape Cod Healthcare Foundation. The rating on the bond is equal to CCHC's Long-Term Issuer Default Rating (IDR) of 'AA-'. Long-Term IDRs reflect ���������ֳ�'s view on an entity's relative vulnerability to default on financial obligations, where nonpayment would reflect the uncured failure of the entity in question.

KEY RATING DRIVERS

Revenue Defensibility - 'bbb'

Dominant Market Presence with a Highly Seasonal Population

CCHC benefits from its dominant market share in its core Cape Cod, MA primary service area, which has historically been in the 72%-73% range. Comparatively, no other provider has more than a single digit market share. Combined Medicaid and self-pay represent a moderate 13% of gross revenue, which ���������ֳ� regards favorably. Due to the Cape's older population, however, CCHC derives a high 60% of gross revenues from Medicare, which ���������ֳ� views as a potential vulnerability. CCHC's aggregate exposure to governmental payors leaves the organization exposed to future state and federal budget cuts or program modifications.

CCHC maintains several strategic affiliations with high-acuity service providers, including with the Dana Farber Cancer Institute and, more recently, with Beth Israel Lahey Health. These affiliations have enabled Cape Cod patients to receive high-end specialty care without having to leave the Cape for treatment in Boston or Providence, RI. Clinical programs at Cape Cod Hospital and space in the new patient pavilion are also set to significantly bolster CCHC's in-house cancer treatment program.

Management has identified additional potential market gains in clinical areas like cardiology, neurology, endocrinology and orthopedics. Additionally, Cape Cod Hospital was granted Level 3 trauma center designation in November 2024 by the Centers for Medicare and Medicaid Service (CMS). Management believes this will allow CCHC to capture an added 400 surgical cases per year from the wider service area.

Cape Cod's patient population is highly seasonal given the area's role as a major tourism destination for residents of New England and the Mid-Atlantic states. As a result, patient volumes tend to peak in the late spring and summer months. Since the pandemic, Cape Cod has recorded strong population growth of over 9% as former urban residents have relocated to the Cape.

Operating Risk - 'bbb'

���������ֳ� Expects Profitability to Gradually Improve

CCHC historically generated sound operating profits prior to the pandemic, with operating EBITDA margins in the 7%-8% range. Operating margins came under severe pressure during the pandemic as volumes declined due to social distancing restrictions and remained unprofitable through FY22 as the system faced macro labor and inflation pressures. In FY23, the system achieved profitability for the first time since FY19, and the operating EBITDA margin recovered to 3.9% in FY23 from 3.4% the year prior.

In FY24, operations would have been profitable if not for a $24 million one-time legal settlement with the U.S. Department of Justice. The settlement was related to CCHC's submission of incomplete documentation to Medicare for a particular cardiac surgery procedure performed at Cape Cod Hospital before 2022. The one-time payment reduced the system's operating margin to -1.3% from 0.9% and the operating EBITDA margin to 2.1% from 4.2%. Through the first quarter of FY25 (Dec. 31, 2024), CCHC realized 0.3% operating, 4% operating EBITDA and 8.6% EBITDA margins, suggesting a return to stronger operations.

���������ֳ� expects the organization will achieve healthier operating results over the medium to longer term. While admissions have only recently recovered, inpatient and outpatient surgeries collectively surpassed pre-pandemic levels in FY24, with outpatient surgery growth offsetting lower inpatient surgeries. Outpatient visits were 42% higher than FY19 levels. Management budgeted an operating EBITDA margin of 6.8% for FY25, but based on positive YTD volumes, the system expects to achieve slightly better margins by year-end.

The system aims to achieve operating margins around the 1% range, equal to operating EBITDA margins of 6%-7%, from fiscal years 2025 to 2028, partly through an $18 million margin improvement plan adopted in 2024. Management then plans to strengthen operating margins to around 2% (roughly equal to an 8% operating EBITDA margin) during fiscal years 2029 to 2030. CCHC's ability to reduce capital spending is a factor in this plan.

New Patient Pavilion Nearing Completion

The new patient tower on CCHC's main Hyannis hospital campus is nearing completion of its 24-month construction period. Construction is essentially finished, with the pavilion expected to open for patients on or around May 11, 2025. CCHC has raised $34.5 million to date via philanthropy with a goal of $40 million to finance the project, borrowed $50 million of tax-exempt debt, and has funded the remainder with $110 million of internal cash and investments.

The new patient pavilion has four floors, as management decided to complete the fourth floor to open space for 32 more medical/surgical beds during the later phases of construction. Rising patient volumes in FY24 and an expected need for more beds drove this decision.

Capital spending was curtailed in fiscal years 2020 and 2021 during the peak of the pandemic, but grew substantially between fiscal years 2022 and 2024, as the tower project began and proceeded through various phases. Capex was over twice depreciation during those three years. For the next five years, however, the system intends to reduce capex to $45 million to $50 million per year, essentially mirroring depreciation expense. CCHC's average age of plant was relatively high at 15.5 years in 2024, but ���������ֳ� anticipates this number will come down in the FY25 metrics once the new patient pavilion is factored into CCHC's operating statistics.

Financial Profile - 'aa'

Significant Balance Sheet Strength Supports Recovery in Stress Scenario

CCHC has historically had good liquidity relative to debt and does not have a defined benefit pension, so no adjustments were made to debt. Unrestricted cash and investments were $594 million at FYE24, equal to 615% cash to debt (all advance Medicare funds and deferred FICA taxes were repaid as of FYE22) and net adjusted debt to adjusted EBITDA was at a favorably negative 9.4x. EBITDA provided 4.4x coverage of MADS and MADS equaled 1.5% of total revenues in FY24 given modest and declining debt levels.

���������ֳ�'s forward look applies revenue and portfolio sensitivity stress based on CCHC's investment asset allocation and looks past the completion of the $200 million patient pavilion project in 2025. CCHC's adjusted leverage metrics in the stressed forward scenario show net adjusted debt to adjusted EBITDA at a consistently favorable negative position and cash to adjusted debt never falling below 400%, consistent with ���������ֳ�'s 'strong' financial profile in the context of midrange revenue and operating risk assessments.

Asymmetric Additional Risk Considerations

No asymmetric risk considerations are relevant to the rating.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

--A sustained trend (i.e. another two years) of weak operating results characterized by operating EBITDA margins materially below 6%-7% would pressure the rating, particularly if weaker operations negatively impact the system's balance sheet.

--Although not anticipated by ���������ֳ� at this time, significant debt issuance by CCHC that materially weakens it adjusted leverage profile could also place downward pressure on the IDR.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

--An upgrade of the IDR is constrained by CCHC's high reliance on governmental sources of revenues, its limitation to a single geographic market and area demographics, along with its partial dependence on seasonal tourism to maintain patient volumes.

PROFILE

CCHC operates the only two acute care hospitals on Cape Cod, Massachusetts: Cape Cod Hospital in Hyannis (CCH) and Falmouth Hospital (FH) in Falmouth, with a combined total of 340 operated beds. In FY24, CCHC reported consolidated revenues of $1.1 billion. The obligated group equated to 96% and 86%, respectively, of consolidated 2024 assets and revenues. ���������ֳ�'s analysis is based on the consolidated system.

Cape Cod includes the entirety of Barnstable County, MA, which has a permanent year-round population of 232,000. The population is highly seasonal, however, as Cape Cod is a major tourist destination. The Cape welcomes some five million visitors annually, principally during the summer and early fall months. Demographically, Cape Cod is notable for having an older populace than Massachusetts and the U.S. more generally, with 34% of residents aged 65 and above compared to approximately 18% for MA and the nation.

Date of Relevant Committee

31-Mar-2025

Sources of Information

In addition to the sources of information identified in ���������ֳ�'s applicable criteria specific below, this action was informed by data from Lumesis.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ���������ֳ�'s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ���������ֳ�'s ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.

Additional information is available on

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Portfolio Analysis Model (PAM), v2.0.1 (1)

ADDITIONAL DISCLOSURES

• Solicitation Status
• Endorsement Policy

ENDORSEMENT STATUS