With an annual rent bill of €230 million, the Southern Cross group is teetering on the brink

THE HOMEPAGE of the Southern Cross Healthcare group gives not even the barest hint of the crisis surrounding the UK’s largest provider of care homes for the elderly. Instead, under the banner: “We care about your needs”, it offers online visitors a search facility for its 750 or so homes, accompanied by a picture of an elderly gentleman happily playing the piano, watched over by a smiling care worker.

But there is precious little for the 31,000 vulnerable residents of Southern Cross (or indeed its staff) to smile about as the company that runs the homes in which they had hoped to live out the rest of their lives in comfort and security teeters on the brink of collapse.

Last week, in a desperate attempt to keep its homes up and running, Southern Cross unilaterally slashed rent payments, withholding 30 per cent of the monthly cash payments due until the end of September. This would, the group said, give it a “summer platform” during which it could thrash out a restructuring plan.

Talks continue with its bankers and landlords, as well as the department of health and local authorities, all of which are “supportive”, believes Southern Cross chairman Christopher Fisher.

The crisis at Southern Cross has been building for some time – last year it warned the government’s swingeing cutbacks to spending would hit revenue and profits, as local authorities came under increasing pressure to cut costs.

Fewer than one in five of its residents are self-funded, which leaves Southern Cross hugely reliant on admissions from local authorities. Occupancy rates have been falling and a number of its homes have seen their “star ratings” withdrawn because of poor service and other failings.

At the same time, the homes are facing increases in utility bills and higher care and other costs.

But the root cause of Southern Cross’s most pressing problem – its huge rent bill – dates back long before local authorities started clamping down on costs.

The business was founded in 1996 and swiftly became a major player. In 2004, it was bought by US private equity giant Blackstone in a £160 million deal, and expanded rapidly. Blackstone went on to buy up NHP, which just happened to be one of the care home group’s largest landlords.

NHP was sold off in 2006 and, that same year, Southern Cross was floated on the London stock exchange with a value of over £420 million. All appeared well for a while and the Southern Cross empire continued to expand, as it bought up properties and sold the freeholds to finance further deals. Its rising rental bill was funded by loans. At the time, it appeared to be the perfect way of expanding without actually spending money, but it was a risky and unsustainable model that was brought to a halt when the financial crisis struck. Southern Cross found itself unable to meet its debts and locked into 25- and 30-year leases with “upward only” reviews that mean its rents are rising by 2.5 per cent a year. Southern Cross’s annual rent bill is now a whopping £230 million.

As rents rise relentlessly, occupancy rates and revenues are falling as local authorities become reluctant to place residents in Southern Cross homes, partly because they are cutting back on costs and partly because of uncertainty over the group’s future.

The group’s auditors warned in May there was “significant doubt” over its ability to continue as a going concern, as losses for the six months to March ballooned to over £300 million, including write-offs linked to past acquisitions.

As the group faces a collapse that could see homes seized by landlords and residents forced to move to alternative accommodation, the blame-game has begun. The unions have no doubt the “scandalous financial engineering” of the private equity industry is at fault although Blackstone has denied any wrongdoing.

Southern Cross was in perfect financial health when it was floated, Blackstone says and, in any case, 95 per cent of the now-toxic leases were in place before it became involved.

Blackstone is, however, reckoned to have made up to £1 billion from Southern Cross, which also appeared in good financial shape when its former chief executive, Philip Scott, sold £13 million of shares in 2007. Scott defends the sale-and-leaseback model and blames the group’s current plight on bad management since he departed four years ago.

As management, past and present, deny responsibility and the financiers shrug off any culpability, the one certainty is the identity of the victims – Southern Cross’s 31,000 helpless residents.

Fiona Walsh writes for the Guardianin London