Sector update: have there been improvements in care home viability?

care home viabilityIt hardly seems any time since I last assessed the viability of the UK’s care home sector, but in the light of recent developments with one of the UK’s largest providers it’s time for an update.

The last blog in December 2018 focused on the implications of the collapse of Southern Cross in 2011. This time it has been prompted by reports this month that Four Seasons, Britain’s second-largest private care home provider with around 320 sites and 22,000 staff, has confirmed it has failed to pay rent on time. It is being seen as a negotiating tactic in order to cut bills, but is this really the case?

Its latest troubles began in 2017 when its owner Terra Firma was unable to pay interest on its debts, most of which are owned by private equity firm H/2 Capital Partners who took control and have overseen the group since then.

The business, which has more than £700 million in debts, appointed Alvarez & Marsal as administrators in April 2019. While the administrators have sought a buyer, it would seem most likely that H/2 will end up cherry picking the best homes and roll its debt into a new vehicle.

An estimated 70% of the care homes in England are small, mainly family-run businesses, while around 30% are owned by overseas investors, according to information published by the LSE in May this year.

In the LSE’s view many of the latter group of owners: “view them as assets for extracting large sums in the form of interest payments, rent and profit”.

In 2014 after the Southern Cross debacle the sector regulator CQC (Care Quality Commission) introduced a new requirement – a statement of financial viability, in a bid to ensure there were no repeats of the situation.

However, it clearly has not worked.

In August this year the insurance provider RMP published an assessment of the current state of care home viability, in which it quoted findings by Manchester University that “the financial models for nearly all the larger private equity-owned care home chains carry significant external debt and interest repayments”.

In addition, it said that spending by local authorities on social care had fallen while at the same time as costs have risen. This rise is attributed to a number of factors several of which are being related to Brexit: difficulties in staff recruitment and retention, restrictions on immigration numbers and, increases of the minimum wage.

Indeed, the GMB Union cites concern from the newly-published Operation Yellowhammer documents regarding the sector: “The adult social care market is already fragile due to declining financial viability of providers. An increase in inflation following EU exit would significantly impact adult social care providers due to increasing staff and support costs, and may lead to provider failure, with smaller providers impacted within 2 – 3 months and larger providers 4 – 6 months after exit”.

The Yellowhammer document, it says, therefore advises planning for potential closures and the handing back of contracts.

Despite these problems, demand outstrips supply in most local authorities, with an estimated current shortage of 65,000 care home beds, while a recent report by Newcastle University finds that an additional 71,000 care home spaces will be needed in the next eight years.

Clearly, funding the cost of care homes is itself in need of urgent attention and support. Call in the restructuring advisors?

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