Southern Cross was not the first company to fail – most councils deal with one or two closures every year. But it was by the far the biggest ever to collapse and highlighted how little financial scrutiny there is of companies paid huge amounts of public money to look after the country’s most vulnerable. Local authorities, the biggest purchasers of care beds, have spent millions of taxpayers’ money hiring management consultants to recommend companies without necessarily assessing future risks. Buy-outs, bond issues, refinancing and inter-company loans contribute to the complex and sometimes risky financial arrangements of some private investors and companies involved in caring for Britain’s most vulnerable - making it difficult for councils to keep track. This regulatory hole isn’t an issue, according to market analyst William Laing, who told The Independent that residents faced little risk as homes were more profitable open than shut – no Southern Cross homes shut, they were taken over by others. Mr Laing said: “It is virtually impossible for local authorities to monitor the financial health of providers on presently available statutory information… The industry has lobbied, rightly in my view, against burdensome regulation, though it recognises that some sort of extra regulation is politically inevitable.” Justin Bowden, a national officer at the GMB union, disagrees: “Despite what was promised after Southern Cross, transparency, overleveraging, tax havens, and debts all remain fundamental unresolved issues in this sector.” Sarah Pickup, president of the Association of Directors of Adult Social Services, said the last thing local authorities needed was for another major provider to fail. “Southern Cross showed us that the market had grown without the financial checks and balances which we need… but this is a sensitive area and it takes time to do.” The Independent and Corporate Watch examined the top-10 care home providers, as ranked by Laing & Buisson, of which eight are for-profit companies (seven private and one provident) and two are not-for-profit. None of the companies examined have exactly the same business model as Southern Cross, but the debt levels of many leave them at the mercy of the market.
Many of the biggest providers continue to struggle with debts taken on before the credit crunch. Last year the NHP property company created HC-One, a new subsidiary, to manage its 236 ex-Southern Cross homes, in partnership with Court Cavendish, another care home operator. To avoid a repeat of the unaffordable rents that contributed to Southern Cross’s demise, HC-One pays NHP 38 per cent less rent than Southern Cross. But NHP is still labouring under debts of £1.8bn that have mounted up after it breached the terms of its original £1.2bn bond in late 2008. The loans remain ‘in standstill’ as the company tries to renegotiate with lenders. Due to this uncertainty, credit ratings agencies Moody's and Fitch have both rated the debt as “junk” or sub-investment grade. In August, Fitch said it may make further downgrades as it could be “challenging to materially improve the operating performance of HC-One in a short period of time” as only 21 per cent of its revenue comes from “more lucrative” private patients (local authorities bulk buy and pay less). An NHP spokesman said it had worked hard to ensure its care homes business model was viable and remained vigilant to ensure it remained that way. The company insists that “HC-One is not burdened with any of the debt of its shareholders.”
With councils increasingly opting to provide care for the elderly at home as long as possible, the better performing companies tend to have more self-paying residents. Barchester Healthcare runs 192 homes with more than half of its residents paying for themselves. It reported a £16m profit in 2011, but it is still wrestling with a £1bn debt pile due to mature in October 2013. This is made worse by another £487m the company owes RBS after a series of interest rate and inflation rate ‘swap’ deals with the bank backfired.
The Barchester group owns the freeholds on 180 of its 192 homes, but a complicated corporate structure was introduced in 2006 that split the operations and ownership of the homes. Its 30-year leases with rents linked to the retail price index (RPI) and increases capped should protect the homes from any problems encountered by the owners. Yet Corporate Watch has learnt that the leases are required to include a 12-week break clause that could be activated by receivers in the event Barchester was unable to pay its debt – allowing the investors to take control of the care homes. A Barchester spokesman said it has “no intention” of defaulting on its debt and is “in discussions with lenders to amend and extend facilities”. Barchester is one of five of care home operators owned from tax havens – which can make thorough scrutiny of company finances very difficult. Its ultimate holding company Grove Ltd – which is part-owned by Irish billionaires John Magnier and JP McManus – is based in Jersey. Another big operator with 65 homes, European Care Group is owned by companies registered in the British Virgin Islands, where accounts are not required to be made public. Four Seasons is owned from Guernsey and Jersey and a company registered in the Cayman Islands owns NHP.
When private equity group Terra Firma bought Four Seasons, the UK’s biggest care home provider, in July this year, it reduced its debt from £780m to £525m. Four Seasons is now paying between 9 per and 12 per cent interest a year, and in August the ratings agency Standard & Poor rated its bonds as ‘junk’ and expressed concerns about the "relatively aggressive capital structure" following the buyout and its "highly leveraged" risk profile. A Four Seasons spokesman said the financing structure is a traditional one which has been used successfully elsewhere in many sectors including health, often at similar levels of rating and leverage.
Bondcare owns 74 homes across England and Scotland. According to the latest available accounts, Bondcare has loans worth £189m, which are largely secured against its property portfolio. However, its assets are outweighed by its borrowings, and several Bondcare subsidiaries are late filing accounts at Companies House. Southern Cross ran 39 of Bondcare’s homes until its collapse. Their management was transferred to a subsidiary Bondcare Nilerace in October 2011. In June this year, its UK parent company, BC2 Ltd was put into ‘fixed charge receivership’ – allowing its directors to be replaced. The new directors include those known turnaround specialists and in October, Bondcare Nilerace changed its name to Akari Care. None of the companies in the Bondcare group is in any form of insolvency, according to Ernst & Young, the receivers. A Bondcare spokesperson said: “Bondcare operates 35 care homes under four operating companies. 39 former Southern Cross nursing homes were operated by Bondcare under a fixed contract have now been passed to another provider”. Bondcare has two intermediary parent companies based in Luxemburg and an ultimate parent company, Finsbury Trust Corporation Limited, registered in Gibraltar. One of the Luxemburg companies has the option to buy all the company’s freeholds for a fixed price until 2029. This gives it the potential opportunity to buy the group’s investment properties for a below-market price and benefit from Luxemburg’s lower taxes. Justin Bowden said: “The Bondcare group seems to be in real financial difficulty. Some companies are choosing to be more transparent, but there has to be statutory regulation rather than surrendering the future of elderly vulnerable people to the casino of the market.” Bondcare said: “Our remaining homes are operating by financially sound, private companies and our resources are focussed on providing high quality care.”
The seventh biggest company Orchard Care Homes is currently debt free after financial difficulties caused by the sale and leaseback of its homes led to an agreement with creditors in 2010 to write off outstanding loans in return for equity in the company. The debts of MHA and Anchor Trust, the two not-for-profit companies in the top-10, are offset by their assets. BUPA, a provident association with no shareholders or dividends, has net assets of almost £4.5bn. The health and social care regulator, the Care Quality Commission, are responsible for monitoring the quality of care homes, public and private. Many feel Southern Cross demonstrated that financial regulation is overdue, as better financial intelligence would help predict any potential future crises. Michelle Mitchell from Age UK said: “Increased financial transparency is essential in order to support vulnerable care home residents. This is a major concern and we are calling on the Government to ensure that Monitor, the NHS Financial Regulator, is given a duty to assess the financial viability of care providers and, where necessary the powers to ensure compliance.” A department of health spokesman said it had been working closely with the care home industry and a public consultation about financial regulation would begin soon.