Britain’s biggest care home operator will run out of cash next year unless it undergoes a radical restructuring of its finances, a leading credit ratings agency has said.
Four Seasons Health Care operates 470 homes and has more than 20,000 beds. The warning about its future from Standard & Poor’s underlines the growing pressure on Britain’s beleaguered care home industry.
Industry experts said at the weekend that half of the country’s care homes were at risk of closure as the sector faced a bigger crisis than the steel industry.
S&P said Elli Investments, the parent company of Four Seasons, faced a cash crunch in the next six months. In the absence of additional funding, it said “the group’s currently available liquidity will likely be consumed by the first semester of 2016 from annual cash interest and rent obligations totalling around £110m, as well as capital expenditure in relation to the group’s ongoing [reorganisation] and refurbishments across its homes,” it said.
Elli Investments is owned by Terra Firma, private equity company run by two of Britain’s best known businessmen. It was founded by the tax exile Guy Hands, who is still chairman, and Justin King, the former Sainsbury’s boss is vice-chairman. King joined Terra Firma last month and oversees the day-to-day operations of the firm’s businesses, which also include the Odeon cinema chain.
Terra Firma used Elli Investments as a vehicle to buy Four Seasons for £825m in 2012, but care homes are being squeezed by a decline in the fees that local authorities pay for places and a rise in staffing costs, which will increase further with the introduction of the “national living wage” next April.
Four Seasons said it had enough financial flexibility for the medium term and that residents’ care would not be affected. It said it would pay a £26m interest bill due in December and had appointed advisers to review its finances before a potential restructuring. The company is struggling under the weight of £500m of debt with an annual interest bill of £50m.
Four Seasons operates across three brands. Four Seasons itself has 350 care homes, brighterkind has 80 focussed primarily on private customers, and the Huntercombe Group runs 40 hospitals and specialist centres focussed on mental health.
S&P said Four Seasons’ capital structure was unsustainable in the short term and that it would have less than £20m in cash left by the end of the year. It said that fees from local authorities would remain constrained in 2016 because of the government’s austerity programme, and that the national living wage and a shortage of nurses would hurt the company further.
The Resolution Foundation has said the introduction of the national living wage will cost the social care industry £1bn between now and 2020. The living standards thinktank has urged the Treasury to cover the cost by using the comprehensive spending review this month to increase the amount local authorities pay care homes.
S&P said Four Seasons was likely to try to raise funds by selling care homes, hitting its profits further. “We believe the company will focus on repositioning services and disposing of underperforming sites to stabilise profitability over the medium term,” the agency said.
“However, as a result, short-term profitability will likely be impacted by a temporary loss of occupancy and the additional costs associated with the group’s segmentation plan.”
Four Seasons hit back at the ratings agency. It said: “We are confident we have financial flexibility well beyond S&P’s projections. We said in August that the group has sufficient medium-term financial flexibility and that remains our position. We also announced in October the appointment of advisers to help us improve that flexibility.
“S&P acknowledged they are not able to consider the ongoing programme of disposals of selected homes that are no longer core to the business, which will generate additional cash. Also they have not factored into their projections our flexibility in respect of capital expenditure. Both of these considerations will improve our liquidity position.
“Additionally, we are confident that the benefits of the operational improvements we have put in place will flow through to financial improvements. We cannot envisage any scenario that would have any effect on the quality of care for residents in our homes or patients in our specialist care units.”
Care England, the sector’s umbrella organisation, said new proposals from the Care Quality Commission (CQC) to increase the fees that care homes pay the regulator would place further strain on the industry.
Martin Green, Care England’s chief executive, said: “At a time when the care sector is facing enormous financial challenges resulting from years of underfunding and increases in staff costs following the implementation of the new living wage, it is totally unacceptable for the regulator to levy higher charges for regulation.
“As a regulator with market oversight responsibilities, the Care Quality Commission should understand that this sector is nearing collapse because of local authorities’ refusal to pay the true cost of care, and there is no justification for the CQC to add to the financial burdens of the sector.”
