Care homes do not have enough cash to meet new regulations, claims Fitch

Ratings agency Fitch has cast new doubts on the financial strength of care home operators by claiming they do not have enough cash reserves to meet tough new regulations being considered by the Government.

By Graham Ruddick
7:15PM BST 14 Oct 2011

In a statement on Friday, Fitch said a scheme requiring care home providers to post capital to prove their financial viability is “unlikely to work” because “several large care home providers do not have sufficient cash reserves to post capital”.

The regulation was proposed by the Government as part of a discussion paper on Monday as it considers how to reform the industry following the demise of Southern Cross Healthcare.

Southern Cross was the UK’s largest care home operator with 750 homes and 31,000 residents. However, the company is in the process of handing over control of its properties to landlords after cuts in local authority fees left it unable to pay rents.

Management of Southern Cross and Blackstone, its former owners, have been heavily criticised for creating a sale-and-leaseback business model that sold off the company’s properties and left it burdened with a £250m annual rental bill.

The chairman of Southern Cross said the demise of the care home group is a “matter of considerable regret”.

However, the GMB union has already warned that the Southern Cross homes could be “jumping from the frying pan into the fire”. NHP, which has formed a joint venture with Court Cavendish to run more than 200 Southern Cross homes, is under the control of bondholders. Meanwhile, banks control Four Seasons, another operator which is in talks to refinance more than £780m of debt.

Both operators have repeatedly said they are profitable and have secure business models in place to run the Southern Cross homes.

In its statement, Fitch named Bupa as a “well-capitalised firm”, but added: “Care home providers have suffered during the crisis from a fall in revenues caused by government spending cuts. At the same time, providers’ costs have increased in line with inflation.

“Southern Cross defaulted because its revenues fell and its costs, particularly rents, increased. Southern Cross was particularly exposed because it rented 100pc of the properties it used. Other large care home providers typically rent between 25pc and 40pc of their properties.

“Before the crisis, care home providers were sought after assets. The government-linked revenues were considered stable and robust and this made them ideal candidates for leveraged buyouts. The drop in revenues and increasing uncertainty about future government policy has triggered a fall in the valuation of these companies and their ability to raise debt.”

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