The number of UK care homes that entered insolvency fell by 24% in 2013, according to research from accountancy firm Wilkins Kennedy.
A total of 51 care home companies entered an insolvency process during 2013, down from 67 in 2012 and 60 in 2011.
The decrease has occurred as many businesses in the sector have reached the end of long-term loans taken on at high interest rates prior to the financial crisis of 2008.
Stephen Grant, partner at Wilkins Kennedy, said: “The care home sector has been turned upside down in recent years with local authority cutbacks forcing many businesses into administration.
“Many of the care homes that struggled through the financial crisis have now disappeared, with the overall financial health of the sector slowly improving as a result.
“However, even though the initial impact of the local authority cuts now seem to have been absorbed, some care home businesses might need to brace themselves for further pain in this area as local authorities face another squeeze in their spending power for 2014-15.”
Wilkins Kennedy cites that many care homes borrowed heavily to fund growth in the lead up to the financial crisis as the care home sector expanded, locking themselves into long-term high interest loans.
Many care homes also used interest rate swaps to protect against future rate rises, which left them unable to benefit from the fall in interest rates when the financial crisis hit six years ago. An increasing number of those swap contracts have now come to an end.
Grant said: “Many care homes have been lumbered with high interest payments on their debt from loans taken on when the sector was expanding because investor interest was high.
“These loans are now reaching the end of their term and for the time being that seems to be freeing up enough money to put many care homes back on an even keel.”
However, Nick Hood, strategy mentor at Opus Restructuring, believes that figures do not give an accurate snapshot of the problems facing the care home sector.
“The slight fall in care home insolvencies is welcome news, but it probably owes much to a more realistic attitude by creditors which is prompting even more informal work outs than before”, Hood said.
“The whole sector is over-burdened with debt, so lenders are taking the pragmatic view that it is better to work with local authorities away from the glare of publicity to see homes transferred into more secure financial hands, even if it means taking a haircut in the process. Quite rightly, many fear what impact a rise interest rates next year will have on the sector’s parlous financial state.”
In February 2014 a survey conducted by business intelligence provider Company Watch, of 5,037 care home companies cumulatively responsible for the operation of approximately 20,000 UK care homes, found 1,185 (23.5%) were in danger of needing a financial rescue of some type.