Extend and Defend - healthcare restructurings in 2012

“Why are care homes in distress?” Ben Larkin asked delegates at July’s Care Conversation. There were five different factors, he explained, depending on the approach of the “banks and other distressed investors”.

The first was over-leverage. “The big transactions of 2004, 2005 and 2006 put too much debt on them – they’re perfectly fine businesses, but they can’t sustain that level of debt,” he said. Other problems were “slightly flawed ‘propco-opco’ or sale-leaseback models” with inflexible rents, as well as cuts in local authority funding. “Strangely enough, with an aging population, you’ve also got some issue of over-supply, particularly in regional areas,” he said. “And finally, occasionally, just very bad management.”

Banks did not particularly like care homes “being in their support departments”, he told the seminar, as there were “a number of reputational issues that they don’t have with other industry sectors”. This particularly applied to the banks’ ultimate sanction of putting the homes into administration. “No bank wants to be in a situation where there’s a Panorama investigation into a care home that happens to be under their control – that’s not good publicity. So there’s always been a natural reticence on the part of the banks.”

The banks had been looking to find ways around this, however, and were becoming more comfortable with the sector, with people they trusted now running many of the businesses. There also remained competition in the market to buy care homes, he pointed out.

Many banks had been selling their loans – either individually or as part of large loan book sales – which meant that loans were ending up in the hands of people who wanted to acquire the businesses rather than just lend to them. These organisations often did not share the same reputational concerns as the banks, he said, and many were investing in specialist expertise, which meant they were likely to remain in the sector.

Most of the previously mentioned highly leveraged transactions of 2005-07 were bank debt-led, said Ali Rana, and although the organisations technically had the cash to pay the interest, it was to the detriment of their business. “They were really ‘levered’ to the hilt, so to speak,” he told delegates. However, leverage markets were now much more measured in their lending to this sort of organisation, and one of the benefits of being in healthcare was that the potential downsides were limited compared to other more discretionary sectors. “It’s still a sector that’s well liked by banks. But they’re going to be a lot more critical of the business plans they receive.”

From a restructuring perspective, there were three main scenarios arising, he said. These were: “amend and extend” – extending the maturity of existing facilities to buy time to pay down debt; total restructuring – which was labour-intensive and could have a severe business impact; and, the most sustainable long-term solution, refinancing based on current market terms combined with an injection of new equity, as in the high profile case of care home operator Four Seasons Health Care.

The latter scenario meant a great deal of thought being put into a new vision for the business, he told the seminar, although there could still be the requirement for creditors to take write-offs in other situations. The case of Four Seasons had also demonstrated that there was demonstrable equity investor appetite – although principally from the private equity industry rather than pension and long-only investors – for the sector, he pointed out. 

“I’ve been asked to speak to you about the restructuring and insolvency options in the public sector,” Shay Bannon told delegates. ”There aren’t any. But they’re coming.”

Historically, while private hospitals had been subject to restructuring and insolvency matters, hospitals under public ownership had not, he said. “To give you an idea of what’s coming down the track, the Government is looking for £20bn of efficiency savings by 2015 – I’ll put inverted commas around ‘efficiency savings’ because it’s not possible to run a business efficiently with that scale of savings. In the five years after that, they’re looking for another £30bn. So despite what any politician says in public, there’s huge transformational change coming for the NHS.”

While the 141 Foundation Trusts were meant to be financially viable and the ‘crème de la crème’ of the public sector, the reality was that 11 were at financial risk, he said, with another 69 NHS Trusts not in a position to be converted to Foundation Trusts, and 60 of these also at risk. “It’s not a sustainable position. The government is bailing these hospitals out, and it needs to do something – if it was left to market forces you would transfer services and close them down, but politicians are always going to defend something that’s on their own patch, even if they know it’s providing unaffordable services.”

The recent high profile case of the South London NHS Trust had caused “wholesale panic”, he stressed. “At the end of the day the problem is that somebody in government has to make the decision about whether that hospital survives, and in what sort of restructured form.” The Health and Social Care Act 2012 introduced a Health Special Administrator (HSA) – a licensed insolvency practitioner appointed by Monitor. “This means they can say it’s a regulatory issue. The only quirk is that when we do jobs in the private sector our primary duty is to the creditors, but the primary duty of the HSA is to ensure the continuity of services, and secondly – if it doesn’t conflict with that – to look after the creditors. You’ll see people dealing with what they think are state bodies and ending up as unsecured creditors getting five or ten pence in the pound.”

The future would see care concentrated in larger, more specialist services and far more private providers getting involved, he said. “Those hospitals that are uneconomic, unviable, not able to deliver the standards of service will go through these processes and will be restructured, downsized or closed.”

In theory this would also apply to care homes, he said, with possible restructuring regimes through the HSA process or the more traditional bank-led route, to maximise the position of creditors. “You’ll find stakeholders trying to balance the two evils and figure out which route they’ll get the better outcome from. It will all become clearer over the next few months.”