Britain’s four largest privately owned care home operators have racked up debts of £40,000 a bed, meaning their annual interest charges alone absorb eight weeks of average fees paid by local authorities on behalf of residents.
Accounts for HC-One, Four Seasons Health Care, Barchester Healthcare, and Care UK — which together run about 900 care homes and look after 55,000 residents — show they are paying an overall average rate of almost 12 per cent interest on total debts of £2.2bn.
This puts their annual interest costs at more than £250m — high for a low-margin business such as social care — according to analysis by Opus Restructuring, the social-care analysts.
The punitive costs — which average £4,800 per bed per year, compared with average local authority fees of about £31,000 — contributed to overall losses at the companies of £900m from 2015 to 2017.
Nick Hood, debt restructuring adviser at Opus, said the figures showed the “debt-laden model, which demands an unsustainable level of return, is completely inappropriate for social care”.
“Hundreds of millions of pounds that could be going into improving facilities and care are being sucked out of the industry every year to fund the debt,” he said.
The strains on the sector have been highlighted by the collapse of Southern Cross in 2011 and more recently Four Seasons being taken over by its creditors after its private equity owner, Terra Firma, ran out of cash to meet interest payments in 2017. This is fuelling questions as to whether debt-laden private investors are the right providers of a vital state-funded service.
Although Terra Firma has taken a £450m loss on Four Seasons, the investment vehicle — which is run by City financier Guy Hands — posted a 30 per cent rise in annual pre-tax profit in January and a sale of some of the more profitable care homes it still owns is under way.
Meanwhile HC-One, the UK’s largest care home operator, has paid out at least £48.5m in dividends in the past two years despite warning that local authority funding cuts had brought the sector to the brink of a financial crisis.
The research by Opus showed that investment in the big four care-home chains declined over the three years to 2017, falling by around £43,000 per home per year and meaning the operators were not spending enough to keep pace with the natural wear and tear of the assets.
Gross capital spend was about £400m, but after disposals of £198m and depreciation charges of £325m, the net investment in the homes fell by £116m, Opus said.
Most UK care homes were managed by local authorities until the former British prime minister Margaret Thatcher, reformed the system in the 1980s; now just 8 per cent are under state control.
All four of Britain’s biggest care-home businesses have been up for sale in the past year and have failed to secure deals, partly due to the financial pressure of a long-term fall in local authority fees. Last week the Australian infrastructure bank Macquarie pulled out of a £2.5bn deal to buy Barchester.
Care England, which represents the independent providers, estimates that around £4bn is needed from the government to stabilise the sector. Although there is a lot of criticism of investors in the industry, “without them there would be no new facilities, and without social care, the NHS would be on its knees,” it added.
As well as sharp cuts to social care budgets after the financial crisis, operators have had to deal with an increase in the minimum wage and rising food costs.
“The issue is not interest payments, but the pressures placed on local authorities as a result of a decade of constrained public spending cuts,” said Tim Hames, director-general of the British Private Equity and Venture Capital Association.
Understanding where taxpayers’ money is going is essential if Britain is to resolve the funding crisis in elderly care. This is made difficult by the companies’ complex, multi-layered offshore private equity structures. “We don’t know whether it is going to the private equity owners or the financiers, or indeed how much is being paid in cash and how much rolled up on the debt,” said Mr Hood.
HC-One, which has about 22,000 beds and 340 care homes, has a corporate structure involving around 50 companies, six of which are registered offshore either in the Cayman Islands or Jersey and a further five in the UK as foreign entities. It said the Opus research “misrepresents our organisation — and indeed the care sector more broadly — and our proven record of providing high-quality care.”
Barchester Healthcare, owned by Irish billionaires rather than private equity, said it “reinvests more than half of its operating profits in upgrading its facilities to constantly improve standards for residents.”
Care UK, which has around 114 care homes and is owned by the private equity firm Bridgepoint, said it “continues to invest in the construction of new care homes that are vital in meeting the growing demands of our ageing population.” It added that it manages with sensible levels of external debt well below the average quoted.”
Four Seasons declined to comment.