-3x Short China Discussion Threads

[fiat lux] 01/6/2011 22:36

Sale and lease-back killed SCHE or should I say mgt hubris and an empire-building mentality

[stud-muffin] 01/6/2011 22:32

On the brink: Struggling care homes provider Southern Cross's failure to pay its rent in full for the next four months could lead to a domino effect with its landlords falling into administration, industry experts have warned
And despite the growing pressure from politicians and unions for a possible bailout, none of the biggest landlords have spoken publicly since Southern Cross (down 1.4p to 6.4p) withheld £20m from its rent payment for the next four months.

Accountancy firm Grant Thornton, which is negotiating on behalf of the 80 landlords Southern Cross owes money to, said it hopes to seek a 'consensual solution'.
More...Latest Southern Cross share price {thisismoney.co.uk}
Shares in the news {thisismoney.co.uk}

Saga director general Ros Altmann warned: 'Lives could be at risk as a result of Southern Cross collapsing and the other major care home company – Four Seasons – is also in trouble. 'It's incestuous and if one falls there will be a domino effect.'

Four Seasons Healthcare, which rents out 40 homes to Southern Cross, is particularly vulnerable.

Bought in 2006 by the Qatar Investment Fund, it ran up debts of £1.5bn, but when the recession hit it was unable to repay its lenders – including RBS – and was forced into a debt-for-equity scheme to pay down £750m.

The remaining £750m debt was due to be repaid by September 2010, but this was extended until September 2012.

But whether the firm can make the repayments by next year is still unknown. NHP – which was previously owned by Southern Cross's former owner, Blackstone – is on the brink of administration.

With debts of more than £1bn, it defaulted last year and is currently being managed by Capita.



Read more:

[mavverick] 01/6/2011 22:32

Not sure how Four Seasons or Bondcare could run the care homes they are NOT LL for any cheaper than SC. SC having been historically above the MW level now are at the minimum wage level.

[still waiting] 01/6/2011 22:30

there you go SCHE is dead, the landlords will want the homes back and run them at a profit without the high rents..

[mavverick] 01/6/2011 22:28

Presume LL's can now legally enforce the return of care homes for them to be the provider, as in Four Seasons and Bondcare above, now SC are defaulting on rent. If this 'safeguards' 84 care homes residents surely SC will have to allow this.

[lej2] 01/6/2011 22:08

Selkirk, I hope that there is some way out of this for the long term PI's still holding but I cannot see it. The residents will be looked after and most of the homes will continue to operate in some way. There will not be a bid for the whole portfolio, although there will be plenty of interest in cherry picking the profitable homes and some PE cash available to buy the freeholds from stricken LL's, at the right price, to be run by a cut down management team.

Critically, there will probably be an unofficial embargo by LA's as individual social workers will not want to place residents with SC given all the doom and gloom in the media. This requires an urgent resolution to the situation - which will not be good news for PI's.

[fiat lux] 01/6/2011 22:03

This was published in the FT only 5 mins ago:

-

Rivals circle Southern Cross

By Simon Mundy

Published: June 1 2011 21:56 | Last updated: June 1 2011 21:56
The desperate financial situation at Southern Cross, Britain's biggest care homes operator, is presenting rivals with an opportunity to expand.

Up to a third of Southern Cross's 750 homes may ultimately close or be taken over by a rival operator, said Christopher Fisher, its chairman, on Tuesday.


The care homes group, which has 31,000 mostly elderly residents, also said it would withhold 30 per cent of its rent for the next four months as it carries out a financial restructuring in a last-ditch effort to avoid bankruptcy.

Bondcare – a rival operator and the landlord at 39 homes managed by Southern Cross – said this week that it wanted to take over the running of those businesses. "Our suggested solution is to take back the operation of our homes and we have offered the same solution to other landlords to deal with this crisis," Bondcare said.

"To date we have not got past first base with Southern Cross in relation to this proposed solution despite being in negotiations with them since December 2010. In our view the rent reduction does not solve the underlying problem."

Bondcare has discussed taking over operations at more than 200 homes owned by other landlords, a person close to the company said.

The second-biggest care home operator, Four Seasons, which is landlord of 45 Southern Cross homes, also wants to take over those businesses, and to replace Southern Cross as the operator at homes owned by other landlords.

Analysts say that, with Southern Cross now failing to meet its rent obligations, any of its larger landlords would be justified in applying to have it put into administration. The company recorded a pre-tax loss of £310.9m in the six months to March, with revenue falling 3.4 per cent to £464.3m due to falling fees.

However, the landlords are believed to be reluctant to pursue such a course. One deterrent is the reputational damage that could ensue from any move to wind up a company responsible for the welfare of thousands of vulnerable people.

A spokesman for David Cameron, prime minister, promised that the government would "look carefully" at the situation. "We will do what we need to do to ensure that there is effective protection for anyone affected," he said.

Practical considerations also come into play, an analyst said: landlords would be unlikely to receive the full rent payments during the administration process, and occupancy rates at the homes would fall as local authorities took fright.

"So if you're a landlord – and this administration process can take a while to work its way through – your homes are getting less and less full, and you're not receiving your rent in any case," he said. "It's not as simple as turning up and saying: 'Right, I'll have my properties back'."

The financial position of some of the landlords gives them little leeway for generosity. NHP – Southern Cross's biggest landlord – has struggled to restructure more than £1bn of debt since it was bought by the Qatar Investment Authority five years ago. Four Seasons, which operates about 350 homes, recently completed a protracted financial restructuring that saw Royal Bank of Scotland take a 40 per cent stake.

Mr Fisher says that feedback from landlords has been "supportive". Southern Cross is happy for landlords with operating capability to "peel off" their homes; if Four Seasons took over at the 45 Southern Cross homes it owns, that would be "consistent with our approach", he adds. Some homes will close altogether, he concedes, putting their number somewhere in the "double digits".

Despite its finances, Southern Cross is in a relatively strong position to guide the terms of its restructuring, an analyst said. "The landlords, unless they put it into administration, need Southern Cross's consent," he said. "They have some good homes and some poor ones ... If you tried to cherry-pick the best assets, why would Southern Cross agree to that?"

Furthermore, other care home operators may prove wary of expanding too quickly and falling into the same trap as Southern Cross, which grew rapidly through an aggressive sale-and-lease-back policy.

Four Seasons could take on enough of Southern Cross's homes to become the country's biggest operator, says William Laing, chief executive of healthcare consultancy Laing & Buisson.

"They will want to take their portfolio in house ... and could gobble up other homes too," he says. "But it would be a pretty violent shock to the system to take over several hundred homes. These companies won't take on homes just to go for growth."

[boffster] 01/6/2011 21:49

Southern Cross "doesn't have a pressing need for new capital"

[selkirk69] 01/6/2011 21:29

If this gets wiped out a lot of sh1t will hit the fan and heads will roll.
A deal needs to be done and I think it will, the model stinks but the business doesn't and has great potential.
It was only a short time ago there were takeover offers, they may return if and that's a big IF the LL's take the hit. IMO if SC go under so do the LL's, to choose just two of the effected parties, it's as simple as that.

[clarendon] 01/6/2011 21:08

Don't forget the impact of minimum wage. I guess most of the care staff are on or around minimum wage. Thats been increasing by c6/7% over the past few years whereas fees have been static. This year certain authorities are looking for fee reductions.Wages are the biggest overhead closely followed by rents so the business model just doesn't work any more.

The 30% reduction in rents will only produce a short term solution. Minimum wage will probably increase again in October so any savings will be wiped out.

The only solution is for the unprofitable homes to be closed and the leases surrendered.

I can see a CVA on the horizon - similar to the Focus DIY/JJB Sports deals where the landlords were compensated through the CVA for surrendering the leases. A CVA is a lot less severe than Administration which would be the end.

[sportbilly1976] 01/6/2011 19:24

Glad I'm not the person who was buying heavily from Oceanwood / UBS recently....mind you - it wasn't their money they were investing with.

[still waiting] 01/6/2011 19:12

some landlords won't be able to take a rent reduction as it will cause them to default, imho there will be a rush of landlords to make the first winding up orders.

this will force bod to put into admin., will be surprised if this hasn't gone by Friday night, no doubt a pre-pack with certain obliging LL's is already in the wings to come out of this with near full occupancy levels as residents are moved across...

gl. for those still in.

[tez123] 01/6/2011 19:09

On sky news now with jeff Randall

This is going get hammered tomorrow.

Not good.

[theband] 01/6/2011 19:04

On ch4 news now

[mavverick] 01/6/2011 18:41

bergster
Not sure what the national picture is. Complex no doubt.

Locally, Social Services have had some budget protection and growth with other Departments taking the hit. Some clients are getting services reduced to provide services to new clients... but overall provision is increasing for the older people group, ...but reducing for other client groups.

Care Home owners will have some muscle together in negotiating and signing contracts so i think there may well now be political and legal pressures from the SC debacle to insert contract clauses from 2012/13 that can negotiate increases where there are demonstrably actual additional costs, open book accounting etc.

[mavverick] 01/6/2011 18:02

EI ok! As you say home care has expanded massively and home care outsourced ++ by councils in England, and will continue to grow rapidly and substantially ++.
Not sure it has had a major impact on the core customers for older people care home businesses who now need 24/7 care(except reducing any need for care home growth), but intensive home care has impacted on care homes for other client groups.
There are cost pressures on care homes as fees are not increasing, etc but the 2 billion extra for social care in the UK budget has helped councils with social care purchasing significantly.

[boffster] 01/6/2011 17:52

I am actually quite sick of this roller coaster of death now. I wish it would just go bust and get it over with.

[bergster56] 01/6/2011 17:41

Big drop here then. Looks like there's real uncertainty in this. We are also assuming landlords have the ability to afford to take 3 month deferrals of rent. With LLs purchasing these homes in the 'good times' through large loans they are also indebted and under pressure to the same banks who are pulling the strings at SCHE - ridiculous.

It all one big game with banks up against the residents, and the management no more then interested spectators. Greed at its worst

[bergster56] 01/6/2011 17:39

Yes the decline of caretech has been marked and quite sudden. They marketed themselves to investors as looking after complex challenging patients who therefore would be immune to LA cuts. These are in fact the biggest targets. Some providers were charging LAs 1-2k per weeks to look after these clients. Unofortunately companies can no longer be paid so handsomely. Social care AND health budgets are slashed meaning these expensive contracts are the kind of thing that is looked at first. I know of numerous businesses who are losing their clients to cheaper home care options.

Again, helping service providers battle inflation of energy/food/rates etc is really for the providers to battle and not for the LAs to help with.

[essentialinvestor] 01/6/2011 16:42

Well mav, we will have to disagree on that one then, as I think
Domicilliary Care has had a pronounced impact in the context on budgetary
constraints - this is one of the reasons why VC's have bought heavily into
Home Care over the last 2/3 years.
My Dad sold his Dom care business to VC for £16M in late 2009 -
they have hoovered up companies providing home care.

Mears also spotted this, buying up multiple companies
and establishing a separate division.

The CTH share price has suffered a large de-rating over the past 12 months,
and they provide more specialised residential care.

Sure some may still be highly profitable operations,
there are huge headwinds imv.

As well as Family involvement in Dom care, I worked at Bupa
for 15 years so have experienced the sector first hand.
My beter half still works in the sector and deals with social workers daily.

[bergster56] 01/6/2011 16:23

kirk, I agree unfortunately.

Mavv,

I dont think homes are/will be in a position to demand upwardly only fee increases as part of contracts in the future. LAs can't afford it. They are being asked to cut huge percentages off their budgets. When you have LAs slashing home care for people with complex physical and/or intellectual disabilities, fee increases to 'help' care homes meet staffing/energy inflation are the least of their concerns

[mavverick] 01/6/2011 15:52

bergster56 Thats interesting.

It makes sense to do this given the variety of fee levels across the uk, (Scotland have a national contract) and LA's will want in many cases to make sure that their 'local' homes survive this if at all possible, particularly where there is under capacity. In areas of over capacity they will be a lot less keen.

May cause issues of parity as other care providers will asak for a similar increase. As you say there will be pressure in future contracts to have clauses that allow for fees to increase to meet key inflation costs such as staff/energy etc.

[stud-muffin] 01/6/2011 15:46

Aside of many of the economic issues and mistakes by SCHE the societal shift in the UK is getting more pronounced.

The 'twigs from the same branch' mentatlity that saw people being cared for in hospitals and care homes as if part of an extended family has all but gone.

Blame it on mass immigration, Thatchers every man for himself philosphy or as above the need to have more 'stuff' above caring about the wider society.

Whatever it is, be sure it will get much worse.

[bergster56] 01/6/2011 15:39

I understand that numerous local authorities are negotiating/re-negotiating fees being paid. Contracts with LLs state upward only rent reviews, but contracts with LAs often dont have the same mechanism built in. Absolute disaster and very very sad. People with complex mental health/physical health and learning disabilities are suffering due to others' need for a big house and sports car.