Southern Cross’s future to be decided by banks
Southern Cross has identified 47 care homes that it wants to hand back to the landlords, almost immediately and a further 85 homes that it would wish to pull out of over the coming five years (see this morning's FT for more on this).
According to sources close to the company, these are the homes that are either not purpose built care homes or, for a variety of reasons, don't seem to have a commercial future looking after the elderly.
There are, I am told, around 30 to 35 care homes that Southern Cross would have wanted to close in any circumstances either because they are too small, older and not quite fit for purpose or because they are in areas where the elderly population is shrinking.
There will be anxieties for the estimated 5,500 residents of the affected homes - but they would not be turfed on to the street. Where a home is actually being closed, it takes between three and six months to find suitable alternative accommodation for residents, and Southern Cross recognises it would be commercial suicide to manage this process in anything other than a consensual and sensitive way.
Southern Cross also acknowledges that rival care home operators, such as Four Seasons and Bondcare, may want to take over the running of other Southern Cross homes where they are already the landlord.
So Southern Cross hopes that it will eventually emerge as a network of 500 homes, down from 752.
But getting there won't be easy. Some 80 different landlords need to agree to the changes, including cuts in rents that average 30%, but will be more than that for some.
The alternative would be for Southern Cross to go into administration under bankruptcy procedures.
An orderly solution as a going concern would seem to be the rational outcome, in part because most of the homes were purpose built and can't be converted to any other use, partly because the uncertainties for 31,000 residents would become a major political issue, and partly because the financial pain resulting from administration would ripple through the system in a way that would damage not only Southern Cross's landlords but also the banks that stand behind the landlords.
Here's the thing, of the 80 different landlords, the ten biggest landlords own 75% of the properties. And most of them borrowed so much in the great property boom that went bust in 2007/8 that they can't easily cope with the cut in rental income being proposed by Southern Cross.
Southern Cross is offering to sweeten the pill by giving the landlords a share of future profits (if such emerge). But that doesn't solve the immediate cash-flow loss for the property owners.
Or to put it another way, whatever action the landlords ultimately take in respect of Southern Cross - whether to support its reconstruction or pull the plug - will need the approval of their own bank creditors.
Southern Cross itself has relatively little debt - it has a £50m facility provided by Barclays and Lloyds - but its landlords are in debt to the tune of many hundreds of millions of pounds. And, to reiterate, much of that debt is being serviced by the rental stream from Southern Cross's homes.
The largest lenders to Southern Cross's landlords are - I am told - Lloyds and Royal Bank of Scotland. A couple of Irish banks (which, conspicuously, aren't in the best shape) are also important lenders to the property owners.
Which means, as if you hadn't guessed, that the fate of Southern Cross and some of its landlords - and of 31,000 vulnerable residents in Southern Cross's homes - may well be decided by the big semi-nationalised banks, Lloyds and RBS.