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Homes need a health check

Provided by Insolvency News

Recent research shows that a third of care home operators are at risk of financial failure. The pressure of spiralling costs and budget cuts in the face of increasing demand means there is likely to be a substantial rise in administrations, finds John Brazier.

According to figures from accountancy firm Wilkins Kennedy, the number of care homes becoming insolvent in the UK rose 12% between 2011 and 2012 – despite overall corporate insolvencies levels falling by 5%.

67 care homes entered administration during 2012, with 60 the year before going the same way. In 2008 that figure stood at just 28.

Stephen Grant, partner at Wilkins Kennedy, believes that the prevailing factor behind these increases is local authority cuts to funding, leaving many care homes unable to service their debts or maintain standards of care for residents.

“Care homes have been really hurt by local authority cutbacks,” he says. “Local authority referrals are a major revenue stream for a sector that is weighed down by very high costs. Many care homes used the boom years to borrow heavily to fund growth. While the boom is over and occupancy levels are down in some homes, the debts remain.

“As well as care home businesses that have already gone into administration, there are a large number of care homes that risk breaking banking conventions.”

Research from Company Watch found that of 4,872 care home companies, responsible for operating approximately 20,000 care homes in the UK, almost one third were at “an above average risk of financial failing” – 1,449 in total.
The research also identified 693 ‘zombie’ companies within the total, with a collective negative net worth of £217m.

“With the demand for care home beds rising inexorably from the current 480,000 to around 600,000 as people live longer, and with demand from baby Boomers for better quality care homes when they need them, the pressure is on the government to ensure the sector meets people’s needs,” says Nick Hood, head of external affairs at Company Watch.

“With almost a third of care home companies in our ‘warning area’, it is clear the sector has some fundamental financial issues that need urgent attention.”

Rent concerns

The principal asset for the majority of care homes is the property itself; therefore the issue of rent becomes paramount. As rent rates and costs increase, the only option for many care homes is to raise fees for residents. Even owners seeking to sell the property as a way of raising funds may struggle to get the amounts required.

“When care homes own their properties, they will struggle to sell for a high enough price in today’s property market,” says Grant. “Many of today’s care homes were brought at the height of the property market and would be sold at a loss if put on the market today.

“On top of this, several care home operators actually sold their properties during the pre-crisis property boom and have been renting the property back ever since. They don’t have any major assets to sell.”

This was the case for Southern Cross Healthcare, the UK’s largest operator of care homes – at one stage the company took care of more than 30,000 residents – which crumbled into insolvency in 2011. Following Southern Cross’ collapse, the government created a financial warning system, under which regular financial health checks will be carried out at 50 of the UK’s largest care home operators.

“At present the Care Quality Commission’s focus is on the larger care home operators following the high-profile collapse of Southern Cross in 2011,” says Hood. “But the real risk is spread across thousands of smaller companies, which have more limited financial resources to cushion the impact of interest rate rises when they do finally increase. For many, their business model is being destroyed by the twin pressures of falling income as local authority budget cuts bit and rising costs caused by increased regulation.”

The figures don’t look encouraging for the sector – with the spiralling costs and no further government funding, there could be a lot more work to come for restructuring and insolvency professionals.