Southern Crossroads: the politics of insolvency?
Given Britain's ageing population it is ironic
that Southern Cross, the nationwide care group, finds itself in
well publicised difficulties Whilst a number of reasons have
been suggested, the most significant appears to be the need to fund
rental payments, following the decision several years ago by the
group's then investors to realise a sizeable capital profit by
selling and leasing back freehold properties.
Clearly if Southern Cross were unable to keep
its 750 homes running there would be a very significant human
cost. It is clear that, as a last resort, government agencies
would have to step in to ensure that residents continue to receive
care and David Cameron has already intervened to guarantee
protection for residents, with the
Government expressly supporting attempts to rescue the
business. However, it is less clear whether this
would mean financial support to the existing group, as opposed to
the local authorities, which traditionally shoulder the burden
where private sector care is not available. In either case
the fact that an organisation might be regarded as being "too
sensitive to fail", has echoes of the banking crisis, where one of
the Government's reasons for intervention was the fact that the
banks were supposedly "too big to fail". It is therefore
interesting to see a further dilution of the principle that in a
free market businesses must be allowed to fail; but then moral
hazard has always been relaxed for those operating in sensitive
sectors you just need to be in tune with the sprit of the age to
understand what is "sensitive" at any particular point in time.
It has ever been the case that those who
withdraw capital from a business must be conscious of the potential
prejudice to creditors; there is always a risk that such
arrangements will be challenged after the event. In this
case, as noted above, it has been suggested by some that the
decision to sell and leaseback freehold properties is a major
reason why the group is now struggling; not least to maintain
payments under the leases that were agreed. However, this
does not just present a dilemma for the group but also for the
landlords who may find that their ability to enforce strict
contractual rights is restricted, not only by the fact that the
group capitalisation is reduced as a direct result of the sale and
leasebacks, but also the reputational and practical constraints on
taking any form of enforcement action. Against this
background, landlords may have little alternative other than to
agree to a deferral of rent in order to to provide the group with a
breathing space to put together a more extensive rescue plan.
A failure to agree this might simply mean that a formal
administration moratorium would be unavoidable, with collateral
damage to the interests of all stakeholders. Given the
background to the group and its activities this may well be a case
where it is in the interests of all of the stakeholders to ensure
that a formal process is avoided, or at least delayed.
As a result of the fact that at least some of
the landlords may have sufficient incentive, whether financial or
reputational, the group is reported to have been able to agree
voluntary deals deferring its monthly rental payments between June
and September in respect of a number of homes; by 30% on average
and more in some circumstances. This has provided time for
the group to embark on an accelerated plan to reduce its cash
requirement by reducing the number of its homes. Whilst these
short term actions will almost certainly need to be followed by a
much more radical restructuring, it does provide a breathing space
during which there may be some choice about which direction the
group should head at the crossroads at which it now finds
itself.
Southern Cross is a large group but there is
no reason why the restructuring of a smaller care home group could
not throw up similar issues. Whilst the care
sector is constantly in the news and is now the subject of a major
government review, this is not the only politically
sensitive sector, and sales and leasebacks of properties is not the
only financing technique that, with the benefit of hindsight, might
cause particular difficulties. These are issues on which the
Blake Lapthorn Insolvency and Business
Recovery team can advise, involving colleagues
from our health care, charities, public
sector and other specialist sector groups as
appropriate.
