Care homes in the balance as Southern Cross struggles
Financial chaos of care home provider Southern Cross is a salutary tale for a government pursuing market-driven reforms
Last week, the future of 750 care homes hung in the balance after the UK’s biggest care home operator warned that it may not have enough funds to stay in business beyond June.
The saga of Southern Cross Healthcare shows what happens when private equity meets public service. After a series of arcane financial deals, the company is facing wipeout unless it can put together an agreement between the complex competing interests of creditors, property investors, bondholders, banks, shareholders and landlords, among them the offshore fund of the Qatari Investment Authority (QIA). Last week, its auditors, PricewaterhouseCoopers warned that there was “significant doubt” over Southern Cross’s ability to remain a viable concern. Latest half-yearly results show that Southern Cross made £311m losses.
“In the event that the group does not reach agreements with its landlords and lenders, and no alternative finance is available, the group is unlikely to be able to trade,” PwC said.
Meanwhile, 31,000 residents, their families and thousands of staff in its care homes across the UK are waiting to hear their fate.
Rachel Thomas, a care assistant in a 70-bed Southern Cross nursing and residential care home in Birmingham, is worried about the future. “There are so many Southern Cross homes – where will the residents go? I care about my residents a lot and I care about my colleagues. We’re the ones who go to their funerals, some of them are like our grandparents. We don’t break our backs 12 hours a day for £6 an hour for the money. It’s the satisfaction of the job.”
Hazel Jones, a head cook at a 60-bed Southern Cross care home in the West Midlands, says: “If the home closes the residents would be devastated. We have one resident who’s 104 and has been here since the home opened. The daughter is in her 80s. What are they going to do?”
In some regions, including Scotland, the north-west and north-east, Southern Cross is almost certainly too big to be allowed to fail. It runs 98 care homes in Scotland and over 100 in both the north-east and north-west. That would make it very difficult to rehouse residents if Southern Cross does go under.
While some local authorities insist that in the event of Southern Cross going bust, they would only have a duty to rehouse those residents they pay for, other councils say they would also help self-funded residents. “We have a statutory responsibility for our clients, but we also have a moral responsibility for the others. We would help them as much as we could,” says a Slough borough council spokeswoman.
At Sefton Park care home in Lanarkshire, which was already earmarked for closure earlier this month after an inspection by the former Care Commission found it in a bad state of repair, the 35 residents and 62 staff have been told they have just 12 weeks to find somewhere else to live and work.
Lesley McDonald, a local councillor, says there is now a scramble to find alternative places for the residents. South Lanarkshire council will be dealing with those residents it was already paying for, she says, but there is concern about those who were paying for the care themselves.
As a result, pressure is growing for the government to step in. “In some areas there is no alternative provision to Southern Cross,” says Labour MP John Spellar. “The government has to play a more active role because individual councils are not in a position to handle the situation alone. At its core, it’s a national, systemic problem.”
The tale of Southern Cross shows how a system of social assurance for older people became a system of financial assurance for investors, how private equity groups and investment funds turned care homes into a money funnel, passing a flow of cash from local authorities into the pockets of bond holders – and how the bubble burst in the care sector’s version of the dotcom boom or the credit crunch.
How did this happen? The problem stems from legislation in the Thatcher years intended to bring the efficiencies of private enterprise into social care.
Caring for vulnerable older people is a statutory obligation under the 1948 National Assistance Act and is exercised on a means-tested basis through local authorities. The National Health Service and Community Care Act 1990 allowed councils to farm out care to any willing provider.
The big companies moved in, including Southern Cross, buying up small care companies or building new homes. As they grew, private equity firms started to show an interest, among them the US firm Blackstone Capital Partners. Investors, when they look at a home full of older people, see a stream of guaranteed income, most of it from local authorities and underpinned by the 1948 legal requirement to provide care. Since the elderly population is rising, investing in care looked like a one-way bet for long-term profit.
Money can be made by separating the income flows from the actual business of care and packaging them as saleable investment instruments – securitisation. Blackstone took control of Southern Cross in 2004 from another private equity firm, West Private Equity. Significantly, that year it also bought NHP (Nursing Home Properties), whose business included leasing care homes to providers (Southern Cross was its biggest tenant) and turning the resulting rental income into high-yield bonds to be sold to investors.
Blackstone floated Southern Cross on the stock market, selling up in 2007. It also sold NHP to an investment fund, Three Delta, with controversial upward-only rental agreements with Southern Cross. This has left Southern Cross with an annual rent bill of around £240m.
There are no signs that revenue could pick up to match the higher rents. Placements by councils in Southern Cross homes continue to fall – they were down 15% from the previous year – in part due to uncertainty over the provider’s financial security and pressure to reduce fees.
The biggest casualty if Southern Cross fails would be political. The government does not want a high-profile collapse while it is pursuing private sector involvement in the NHS. But care services minister, Paul Burstow, is adamant that the coalition will not rescue the beleaguered company. “It is Southern Cross’s responsibility to deliver on the plan they have for turning around their financial difficulties,” he wrote to Spellar. Southern Cross chief executive Jamie Buchan last week said that he is confident he can clinch a deal with landlords that would involve a temporary rent reduction of 30%.
A company spokeswoman added: “Southern Cross Healthcare has no plans for a large-scale closure of homes. The company is in the early stages of its financial restructuring. All stakeholders agree that the priority is the continuity of care.” Meanwhile, residents and their families are faced with uncertainty and local authorities are being forced to put contingency plans in place should the care group go under.
Peter Hay, president of the Association of Directors of Adult Social Services, says: “If all parties work together effectively these difficult issues can be overcome. We are committed to the welfare of residents because we can bring expertise and reassurance throughout the process.”
• Some names have been changed.