Southern Cross – another tale of banking and property greed

This time around, the story making the national press is all about care homes, and what will happen to the old folk in them if Southern Cross goes bust. The care home operator is in trouble, squeezed by tightening income on the one hand, and substantial operating costs on the other; with the latter including property costs invariably set against massive lending somewhere along the line.

But behind this worrying tale is a repeat of so many other recent stories about banks and property companies investing in an unsustainable – or barely sustainable – bubble. Banks were happy to lend, and property people happy to do deals, confident about (or blind to) the belief in a steady, rising income stream that would cover the costs over the long term.

The thread is common to several companies in recent years who bought, and borrowed against buildings. There were pubs, which once saddled with debt were then passed on to would-be landlords who could never sell enough beer to cover the rent; and plenty of one-off buildings, such as the Citypoint office tower in central London, bought in the good times and cranked up with £535m of debt, now worth probably 20% less than that and with rental income failing to cover interest payments. But these tales had less to do with old, vulnerable folk.

The big shift, according to a piece in the Financial Times, is that local authorities worked out not only did people prefer to stay in their own homes, it was actually cheaper to care for them there. So the income stream on which this house of cards was built, started to look shaky. Southern Cross occupancy fell from 91% in 2006, to 86% in 2010, according to figures published by Property Week.

And while it is only now coming to a head in the mainstream media, the Southern Cross story has been a car crash taking place in slow motion. Back in November 2009, it was reported that Southern Cross was flogging off the family silver – the freeholds of its care homes – to help reduce its debts. When the property market is strong, sale and leaseback may be a good strategy. At other times, it smacks of desperation.

Then, last September, the country’s third largest care home operator Four Seasons managed to extend a deadline to repay £500m of debt, by two years. In February this year, analysts were forecasting problems ahead, though they reckoned it would not be this year. Investec Securities analyst Sebastien Jantet said Southern Cross was “likely to be in breach of its debt covenant in the second half of 2012 and [will have] run out of cash with which to pay the landlords”. And here’s their prediction of the company’s future performance (originally published in Property Week).

Southern Cross profits don't look good

There’s no quick fix, and Southern Cross will try to negotiate lower rents with the landlords of the care homes it has sold and now rents back. The deal is by no means done; on June 1, City AM newspaper reported that Bondcare, which owns 40 of Southern Cross’s premises, is not going to support a rescue proposal.



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