Restructure Update (9912O)

TIDMSCHE

RNS Number : 9912O

Southern Cross Healthcare Grp PLC

27 September 2011

27 September 2011

Southern Cross Healthcare Group PLC

("Southern Cross", "the Company" or "the Group")

Announcement of Final Form of Restructuring

- Implementation of Restructuring Underway -

The Board of Southern Cross announces that it has reached agreement with its principal landlords and lenders on the final form of the restructuring of the Group (the "Restructuring") and that the process of transferring its homes to new operators is now being initiated on a basis which provides for the continuity of care for residents. The Restructuring, which is described below, involves the assignment of the Group's operating leases of care homes to its landlords and the transfer of the related business and assets for the care operations of those homes (including back office support) to its landlords or alternative care providers.

Such arrangements are intended to facilitate an orderly wind-down of the Group's operations on a basis which ensures continuity of care at the home level is maintained. The Restructuring relies on the continuing support of the Group's landlords and lenders.

The United Kingdom Listing Authority (the "UKLA") has granted a waiver pursuant to Listing Rule 10.8 in respect of the requirement to prepare a circular and obtain shareholder approval for the Restructuring, available only to companies in severe financial difficulty. In connection with that waiver, the Board confirms, as it has confirmed to the UKLA, that in respect of the Restructuring:

-- This was the only form of restructuring to which its landlords would agree;

-- It has not been possible to make the Restructuring conditional upon shareholder approval;

-- All alternative methods of financing its immediate working capital needs have been exhausted and the only solvent option remaining to the Company is to implement the Restructuring; and

-- By taking the decision to implement the Restructuring, the Directors believe that they are acting in the best interests of the Company.

In the event that the Restructuring cannot be progressed, the loss of support of creditors would mean the Company and a number of its subsidiaries will be unable to continue to trade resulting in the appointment of receivers, liquidators or administrators.

Background and current position

As highlighted in the Company's interim results for the six months ended 31 March 2011 which were published on 19 May 2011, the Company has been facing serious financial challenges for some time.

The Group's financial situation is such that it is unable to meet its full rental obligations to the landlords from whom it leases the care homes that it operates and, currently, is only able to continue its operations as a result of the continued temporary deferral of rental obligations from its landlords and the continued temporary provision of credit lines from its lenders, Barclays Bank PLC and Lloyds TSB Bank PLC (the "Lenders").

As previously announced on 14 March 2011, the Board has been in discussions with its advisers, its landlords and the Lenders regarding options for a restructuring of the Group. On 23 September 2011, landlords representing over 80% (by number) of the Group's homes confirmed that they would not agree to their acquisitions from the Group being conditional upon receipt of shareholder approval. The Lenders' continued support is conditional on the landlords' support of the Group, which is in turn conditional on the grant of an exemption pursuant to Listing Rule 10.8 in respect of the Restructuring.

Without the landlords' and the Lenders' continued support it would not be possible to implement the Restructuring. In the event that the Restructuring cannot be progressed, the loss of support of creditors will mean the Company and a number of its subsidiaries will be unable to continue to trade resulting in the appointment of receivers, liquidators or administrators. In such circumstances, there would be no value left for distribution to the Company's shareholders.

The Restructuring

The Board has been advised that in light of the serious financial position of the Company, it should have primary regard to the interests of creditors. Two courses of actions were identified by the Board: (i) to implement an appropriate insolvency procedure; or (ii) to attempt a restructuring of the Group on terms agreeable to major creditors. Under both courses there would be no value left for distribution to the Company's shareholders. The Board has concluded that the Restructuring of the Group is clearly the preferable route as it will ensure maintenance of continuity of care for residents.

The Restructuring, which is driven by a restructuring agreement between the Company, its Lenders and landlords which will become effective on its execution by landlords in respect of 75% (by number) of the Group's care homes, may be summarised as follows:

-- The Group's operating leases will be assigned to its landlords and the related business for the care operations of those leased homes together with the employees working in those homes, will be transferred or "transitioned" to its landlords or their chosen alternative care providers.

-- In order to ensure that continuity of care is maintained, the Group will transfer to HC-One, a company formed for the purpose of operating care homes owned by NHP, that part of its operations which provide "back office" support and HC-One/NHP will continue to provide such support to some landlords and alternative care providers for a period of time following completion of the transfer of homes. The Lenders require all parties to have signed documentation relating to these arrangements prior to the Lenders entering into the restructuring agreement.

-- In return for the orderly transition of homes and the Lenders' support, landlords will continue to provide additional working capital support to the Group by forbearing from exercising their existing rights against the Group, and by providing a full deferral of the rent due to them during September 2011.

-- The Lenders will continue to make the Group's revolving credit facility available during the transition period.

-- The 11 leasehold properties identified by the Group as having a material positive realisable assignment value (which are the subject of security in favour of the Lenders) will be sold to new operators in return for a payment of GBP1,025,000, of which GBP1,000,000 will flow to one of the Lenders, Barclays Bank PLC. Conditional agreements in respect of 8 of these homes have been entered into already, resulting in a payment of GBP925,000 to Barclays Bank PLC.

-- The Group's 19 freehold properties, which are subject to fixed charge security, will be sold to third parties.

-- The Board hopes to have completed the disposals by early November 2011, and in any event expects that all such disposals will have been completed by the end of 2011.

-- There will be an orderly wind down of the Group's residual operations.

-- Following completion of the disposals and expiry of the transition period the Board is intending to put the Company into a solvent liquidation.

HC-One's obligations under its Business Purchase Agreement with the Company are conditional on NHP receiving the consent of Capita Asset Services (UK) Limited ("Capita") in its capacity as servicer and special servicer in respect of NHP's senior GBP1,172,000,000 debt facility (the "NHP Facility"). The care homes the subject of that agreement represent approximately 33% (by number) of the care homes operated by the Southern Cross Group. Capita and its advisers have been fully involved in the negotiation of the Restructuring. Capita has confirmed to the Company, (i) that it is strongly supportive of the agreed basis for NHP's participation in the Restructuring and believes that to be in the best interests of its stakeholders, being the lenders under the NHP Facility, (ii) it considers the entering into and implementation of NHP's participation in the Restructuring to be in accordance with the servicing standard to which Capita must adhere and (iii) assuming that the transition of the NHP-owned homes remains in compliance with the servicing standard Capita's Special Servicing Committee will be convened to agree on final consent to NHP's participation in the Restructuring promptly following, (a) finalising the documentation with NHP's operator, the commercial terms of which are substantially agreed and which is expected to be finalised on or about 30 September, and (b) the release of this announcement.

The Company has been informed that the obligations of London & Regional, Citrus, Loyd and PHF with respect to their Business Purchase Agreements are subject, in each case, to consent from institutions which are providers of debt finance to them. Taken together the care homes subject to these Business Purchase Agreements represent approximately 27% (by number) of the care homes operated by the Southern Cross Group. London & Regional has confirmed that all of its lenders have been fully involved in the negotiations of the Restructuring and that it has been advised to enter into their Business Purchase Agreement and the Restructuring Agreement. London & Regional expect to receive consent from their lenders not later than 30 September 2011. Citrus has confirmed to the Company that it expects to receive the required consent of its lenders within seven days of the release of this announcement. Loyd has confirmed to the Company, (i) that four of its seven lenders have given consent to its entering into its Business Purchase Agreement and that Grant Thornton has advised that Loyd should enter into its Business Purchase Agreement, and (ii) that it expects to receive the required consent from the final three of its seven lenders within seven days of the release of this announcement.

Other landlords will also need to address lender or other consent issues before their respective participations in the Restructuring become unconditionally effective.

The Board anticipates that following implementation of the Restructuring, the proceeds of the disposals of the freehold properties that it owns, which are anticipated to occur as part of the Restructuring, are likely to be materially less than the indebtedness owed to the Group's landlords and the Lenders and that after the sale and transfer of assets for value, there will remain a material shortfall owing to the Group's landlords, the Lenders and HM Revenue & Customs ("HMRC"). The Restructuring Agreement makes provision for landlords and the Lenders to support certain compromise arrangements to address that material shortfall. It is planned that these compromise arrangements will result in the satisfaction by way of compromise of all such residual liabilities to creditors and the Board does not expect that there will be any value left for distribution to the Company's shareholders.

The Directors are of the opinion that the working capital available to the Company is not sufficient for the Group's present requirements. The Restructuring has been structured with the support of landlords and Lenders with the intention of enabling the orderly handover of homes and the wind-down of business operations during the anticipated transition period. The continued support of the Lenders, the Group's landlords and HMRC and the performance of the legal agreements underpinning the Restructuring will be critical to achieving those objectives.

The Company's sponsor, Morgan Stanley & Co, Limited ("Morgan Stanley"), has confirmed to the Company and to the UKLA that, in its opinion and on the basis of the information available to Morgan Stanley (i) the Company is in severe financial difficulty and (ii) if the Restructuring, which the Board has concluded is clearly the preferable route to ensure maintenance of continuity of care for residents, cannot be progressed, the loss of support of creditors will mean the Company and a number of its subsidiaries will be unable to continue to trade resulting in the appointment of receivers, liquidators or administrators. In any event, following completion of the disposals and expiry of the transition period as outlined above, the board is intending to put the Company into a solvent liquidation in due course.

The Directors believe that the Restructuring is in the best interests of the Company.

Board membership

The Company has recently announced that Jamie Buchan, its chief executive, and David Smith, its finance director, will be standing down from Board membership later in the restructuring process.

With the terms of the Restructuring now finalised and its implementation underway Christopher Fisher, who stepped up to become chairman in April of this year, has decided it would now be appropriate for him to step down from the Board with effect from 30 September, the planned date for the first wave of home transfers.

Christopher Fisher, the Chairman of Southern Cross, commented:

"The Board would like to pay tribute to all our staff and managers who have sustained our business through the difficult times which we have experienced this year, and for the care they are continuing to provide to residents through this final phase of transition.

"The Board has also appreciated the support of its creditors, which has enabled us to maintain continuity of care for our residents and, under the Restructuring now agreed, should provide a stable framework for the transition of our homes and thereafter an orderly wind down of the Company's affairs. The understanding of our residents and their relatives through a period of uncertainty should also be recognised.

"The demise of Southern Cross is a matter of considerable regret. It has involved the loss of all shareholder value as well as a loss of value for our principal creditors, and will entail a number of job losses for our central staff. Nevertheless, in relation to the challenges we have faced this year the final outcome now in prospect represents a considerable achievement, and I would like to thank all those who have worked so hard to that end."

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For further information, please contact:

 
Southern Cross Healthcare Group 
 PLC                                               [phone] 
Amy Kroviak, Corporate Communications 
 
 FTI Consulting                                   [phone] 
 John Waples / Ben Brewerton 
  / Susan Quigley 
 
 

This announcement has been issued by, and is the sole responsibility of, the Company.

Morgan Stanley is acting for the Company as a sponsor in connection with Listing Rule 10.8 and for no one else in connection with the Restructuring and will not be responsible to anyone other than the Company for providing the protections afforded to customers of Morgan Stanley or for affording advice in relation to the Restructuring, the contents of this announcement or any transaction, arrangement or other matter referred to in this announcement. Apart from the responsibilities and liabilities, if any, that may be imposed on Morgan Stanley by the Listing Rules, Morgan Stanley does not accept any responsibility whatsoever and makes no representation or warranty, express or implied, for the contents of this announcement, including its accuracy, completeness or verification or for any other statement made or purported to be made by the Company, or on the Company's behalf, or by Morgan Stanley, or on Morgan Stanley's behalf, in connection with the Company or the Restructuring, and nothing in this announcement is or shall be relied upon as a promise or representation in this respect, whether as to the past or future. Morgan Stanley accordingly disclaims to the fullest extent permitted by law and under the Listing Rules all and any responsibility and liability, whether arising in tort, contract or otherwise, which it might otherwise have in respect of this announcement and any such statement.

This information is provided by RNS

The company news service from the London Stock Exchange

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