Southern Cross slashes rent to avoid mass care home closure

Experts warn that care home provider could soon collapse into administration

The crisis at troubled care home provider Southern Cross has deepened after the company slashed its rent payments in an effort to keep its 750 residential homes running.

Healthcare specialists warned on Wednesday that Southern Cross could collapse within months if it cannot hammer out a credible restructuring plan with its banks and landlords. The ongoing turmoil has left the company’s 31,000 elderly residents and their families facing an uncertain future, prompting fierce criticism of its management and strategy.

“Southern Cross certainly could go under,” William Laing, health economist at Laing and Buisson, told BBC Radio 4’s Today programme, speaking after Southern Cross unilaterally decided to hold back 30% of its rent payments over the next four months.

Southern Cross has been in serious trouble for several months, and has already breached key conditions imposed by its bankers. It has blamed public spending cutbacks for reducing its earnings from local councils – a key source of revenue, along with rising rents and increased care costs. City analysts, though, say the company is paying the price for poor decisions taken when it was owned by a private equity company.

Laing believes that most of Southern Cross’s care homes would keep running if it slumped into administration, as they are more valuable as operating business than empty buildings. There is concern, though, that local authorities may struggle if they were suddenly handed control of the company’s sites.

Peter Hay, the president of the Association of Directors of Adult Social Services, said the situation at Southern Cross was extremely worrying, and suggested that a small number of its homes may have to close. However, he moved to reassure residents and their families.

“Underneath there is a viable business that can be structured … there is no need to talk about mass closure, or the mass movement of people in these homes.”

Southern Cross was floated on the stock market in 2006 by private equity firm Blackstone. Southern Cross had enthusiastically followed a strategy of buying up nursing homes, then selling them onto landlords, and relying on affordable borrowing costs to pay its rents. This approach began to unravel in 2007, when the credit crunch struck.

Laing criticised the company for effectively mortgaging itself to the hilt in the run-up to the financial crisis. “The company did make some strategic errors,” he said, while Hay claimed that the company had failed in the past to make the care and security of its residents its top priority.

The GMB union has been a vocal critic of Southern Cross, and on Wednesday it said that the UK government must now step in.

“These are not factories facing closure, they are a vital part of the social fabric of every community,” said GMB general secretary Paul Kenny.

Twenty four MPs have signed a recent early day motion urging ministers to get ready to intervene in the Southern Cross debacle.

Rent payments deferral

Southern Cross itself warned last month that it is now in a “critical financial position”, after seeing rent payments rise faster than its income. The firm, which leases most of its properties, estimated that the number of admissions from local authorities has dropped by 15% over the past year.

On Tuesday it announced that it will defer 30% of its monthly cash rental payments from 1 June to 30 September 2011, creating what it called a “summer platform” during which it could agree a restructuring package.

“The objective will be to emerge with a stable and sustainable business model for the continuing care of our residents. Our primary concern is the continuity of care to all our 31,000 residents,” said chairman Christopher Fisher.

However, none of its landlords have yet said whether they back the plan.

Southern Cross made a pre-tax loss of £310.9m in the six months to 31 March, and its auditors PricewaterhouseCoopers recently warned there was “significant doubt” over its ability to keep running.