NHP controls fate of Southern Cross

Southern Cross sign Southern Cross is meeting with landlords and the Department of Health this week

The most troubling statement that the chairman of Southern Cross Christopher Fisher made on Radio 4's Today Programme this morning was that in any of its typical care homes with a capacity for 50 residents, Southern Cross makes a profit if 46 of the beds are occupied and a loss if occupancy falls to 43.

Or to put it another way, profit margins are so slim that a 6.5% swing in occupancy levels is the difference between corporate life and death.

Now two momentous conclusions follow from what would be described in the business as this extreme operational gearing.

First, all the negative publicity surrounding Southern Cross is killing the company - because any uncertainty about it's future makes it harder for Southern Cross to persuade families and local authorities to place vulnerable elderly people in its homes.

Why would anyone choose a Southern Cross home when it is unclear who will be running the home in a few weeks time - and when, for all Mr Fisher's protestations that wholesale closures of homes are very unlikely, he can't guarantee stability unless and until it's creditors guarantee that?

But if occupancy in Southern Cross's homes falls significantly in the coming weeks, the losses generated by the business may increase to an extent that any pretence that it is a going concern will become impossible.

Which is why a meeting on Wednesday between Southern Cross, its 80 landlords, the Department of Health and lenders is so vitally important.

Southern Cross's hope is that they will all sign a statement pledging continuity of care for the company's 31,000 residents in its 751 homes - irrespective of whether the company is rescued and reconstructed or whether it falls into administration.

If they make that pledge, it is probably reasonable for families and local authorities to trade with Southern Cross on a business-as-usual basis. In the absence of such a statement, well goodness only knows what will happen.

Now there is one company that is probably more important to the stability of Southern Cross and its residents than any other. It is NHP, Southern Cross's most important landlord by far as owner of 249 of Southern Cross's homes.

If NHP were to agree to cut rents payable by Southern Cross then Southern Cross would probably have a viable future.

The problem is that NHP itself borrowed far too much, and is currently controlled by its creditors, a vast and disparate group of investors in bonds.

They rely on Southern Cross's homes for more than 90% of their income from care homes - so Southern Cross's proposal to cut rental payments by a third on average impairs their ability to get the money back they're owed on hundreds of millions of pounds of loans.

But although these creditors may view rental cuts with the relish most of us show for a plate of sick, they may have no alternative but to accept an income cut - given that UK public expenditure is under long-term downward pressure.

It is however proving incredibly difficult for Southern Cross to secure agreement from NHP on anything, even a general statement of intent that it will do all it can to ensure an orderly solution that doesn't harm residents.

The reason is that NHP has anything but a conventional corporate structure. Its creditors are co-ordinated by the outsourcing firm Capita and it appears to be run by experts in corporate reconstruction.

So it is not at all clear who speaks for NHP.

That said, and to repeat, if NHP's and Southern Cross's interests can be aligned, Southern Cross could perhaps have a viable future.

Which is why Southern Cross is offering to share future profits (if any) with landlords such as NHP that take a rent cut - and why it is proposing to transfer the operation of it's homes to any landlords with the expertise and appetite to take on that responsibility.

NHP has no expertise in actually managing care homes. Even so, the interesting question is whether it would be rational to merge NHP and Southern Cross, to create a business with more flexibility to cope with unforeseen changes in the economic climate.

That brings me to the second momentous conclusion of Mr Fisher's admission that a 6.5% drop in residency can wipe out profits - which is that (many would argue) it is far too risky a basis to run a company charged with looking after the welfare of 31,000 vulnerable elderly people.

Even if the company denies - as it does - that it ever deliberately cuts corners in the provision of care, the pressures on it to do so are conspicuous, and disturbing.

So whatever emerges from Southern Cross's crisis must surely be a business whose basic structure is far more robust, where there is no doubt about it's ability to cope in bad times as well as good.

And if there is an oddity about this potential debacle, it is that the Department of Health and local authorities did not look more closely at the shaky structure of the private care-home industry before facilitating its explosive and dangerous growth by channelling hundreds of millions of pounds in its direction.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 77.

    "Control", definition in the Oxford Reference Dictionary is the power of directing or restraining; self-restraint; a means of restraining or regulating.

    I suggest all concerned look up the definition of "out of control".

  • rate this

    Comment number 76.

    The care home groups have been run as property companies, and it is a broken model. I find it incredible that no one is looking at deploying technology to make lng term sustainable change in the operating platform by putting the resident first. The systems are there. SX are making all the noise as they have no soutions, so they sit waiting for someone to offer a way out.

  • Comment number 75.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 74.

    What crash,we've never had it so good!

  • rate this

    Comment number 73.

    do the maths
    20 old folf, 24/7 minimum 12 carers. on-site manager, cook, cleaners,
    so maybe 15 people 40 hour weeks at 10 pounds per hour inclusive of employers NI equals 300pounds per resident - no heating, laundry, business rates, insurance, building maintenance, water rates or FOOD
    2000 per month is break even charges

  • rate this

    Comment number 72.

    Everyone takes their cut after which whats left gets sluiced via the bank ponzi { another set of bonuses all round} into the last two tiers known euphemistickalley as pension funds,there to lie dormant until future tale end charley taxpayers are born with a Brown spoon in their mouth.

    What is it about reality that people find difficult to understand?

  • rate this

    Comment number 71.

    Private Care homes came about because Councils wanted to palm off expensive care, at least Southern Cross didnt' take people's homes to pay care costs that should have been met by the NHS. How long before Councils provide no services other than wages and pensions for their staff ? Reality bites, and it is going to do so harder and more often if we keep returning the same politicians.

  • rate this

    Comment number 70.

    The aspect of Blackstones involvement (since SC was fully into the sale and leaseback model long before) is the renegotiation of leases with NHP which occurred when both were beneficially owned by Blackstone. The terms of those leases surely being material in the valuation of the sale of NHP shortly after. I just wonder why anyone would buy anything from a PE group? Too many end up dead ducks.

  • rate this

    Comment number 69.

    £2,000+/month/resident and they still can't make a profit? Let's look at the interest they're being charged and the return on capital employed, shall we? They must think we were born yesterday if they're looking for sympathy.

  • rate this

    Comment number 68.

    Southern Cross is another symptom of a failed system.

    Sure, they can be bailed out or debts rescheduled - but that's just a sticking plaster. Another will no doubt come along to take its place.

    What to do? I haven't got a clue. You can't propose a solution until you understand the problem. That requires comprehensive and reliable information.

    That's something we do not possess.

  • rate this

    Comment number 67.

    The folly of outsourcing and selling off property assets, I notice that the BBC has stated it is planning to do this for White City. Wonder if that will lead to more money bein spent on rents in the future? Will the Beeb go the same way as southern cross, probably not as then the government would probably allow a licence fee rise.

  • rate this

    Comment number 66.

    Once upon a time businesses used to have contingency built into their projections, nowadays they seem to plan only against the best projections making for risky futures. We saw that the the banking system was bought to its knees by property speculation. Now we see the NHS through PFI costing more and Southern cross and is landlords going broke after taking short term gains from property values.

  • rate this

    Comment number 65.

    Southern cross "landlords " buy in and out of an investment pool without the costs [legal costs, stamp tax searches ] associated with the buying and selling of property, even the council tax liability normally suspendable for only short periods is transfered to the front opperating company.

    Leaving a diminishing pool of plankton for Authorities to draw tax revenues from.

  • rate this

    Comment number 64.

    To many people trying to salami slice profits out of the activity and shareholder dividend on top. Charitable status not for profit model looks the best. As for 46 out of 50 occupancy gives a profit - if these guys want to stay private haven't they heard of late room booking sites and discounts.

  • rate this

    Comment number 63.


    Would a windmill by any other name [such as gaaas generraaation]

    smell so sweetie pie in the sky.

    I'm putting a wind turbine on my roof with a natural gas powered fan behind it,where/how do I claim my subsidy?

  • rate this

    Comment number 62.

    Full Employment. Renationalize it all. Rebuild the state. Security and a Decent share for all. A rail network that operates and is affordable. Abandon the free enterprise disaster, it's too expensive in the long run. Proud citizens and a strong state.

  • rate this

    Comment number 61.

    @56 BluesBerry

    Yes, Blackstone inherited 95% leaseback. However, they also added significantly to the portfolio, also on leaseback, so the are not entirely blame free.

  • rate this

    Comment number 60.

    #20: Care can be incredibly expensive to provide; even more expensive to do properly. Not just rents, but staff wages. Interesting BBC story last week showed Southern Cross has 44000 staff / 31000 residents. Some will be admin staff , but mostly care staff needed to provide 24x7x365 cover. Given SC's money woes, this is likely to be close to minimum staff needed to stay safe and legal.

  • rate this

    Comment number 59.

    So care provider borrows money for new buildings but is now unable to pay rent without compromising care due to cuts in funding. Could the whole southern cross debacle be a wake up call for pfi? Are the landlords (banks) looking at the negotiations with the DoH as a dry run?

  • rate this

    Comment number 58.

    Business, Innovation & Skills confirms Vince Cable has asked it to look at issues around ownership & financial health of entities providing public services. Parliament’s Health Select Committee is looking into Southern Cross. Qatar Investment Authority also owned care home provider Four Seasons Health Care (private equity-style deal). In short: it's a mess - needs new structure/regulation.


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