Southern Cross on the brink as losses soar
Friday 20 May 2011
Southern Cross Healthcare admitted its future was in "significant doubt" yesterday after it slumped to losses of more than £300m and said crucial talks with its landlords had stalled.
The beleaguered care homes operator is looking to slash its £248.3m rent bill and inject more cash into the business. One analyst warned that it would not survive unless a deal with landlords could be agreed. The lives of 31,000 elderly residents and 44,000 Southern Cross staff could be affected.
Yesterday, the Darlington-based company released its results for the six months to the end of March. Losses soared to £310.9m from £22.9m a year earlier after the weakness of its finances forced a £220m goodwill write-off. Sebastien Jantet, an analyst at Investec, said the numbers made "pretty grim reading" and Southern Cross was "still in no man's land".
Trading has deteriorated because local authorities are spending less on residential care and the company is earning less from fees. Southern Cross's debts almost doubled from £7.3m at the end of its last financial year to £14.4m at the end of March.
Its new chairman, Christopher Fisher, admitted that the business was "now in a critical financial position and cannot afford to meet its future rent obligations in full".
The firm's negotiations with its landlords have become increasingly fraught. Mr Fisher said: "The key stakeholders will need to agree on a comprehensive package to restructure Southern Cross's financial affairs so that a new, stable and sustainable corporate and business model can be developed."
The chief executive, Jamie Buchan, said there were "reasonable grounds" for believing a deal could be reached but he recognised there was "material uncertainty with respect to the timeframe and achievability of this". This week, Southern Cross asked landlords to defer 30 per cent of this summer's rent demands, as it tries to come up with a restructuring deal that they will find palatable.
A source close to the company said "nothing was off the table" after talk of offering equity for rent emerged this month, but he added that no terms had been offered yet. There are plans to potentially raise funds by closing up to 200 of its 750 care homes.
Southern Cross's executives first admitted in March that its rent bills were unsustainable and that it had opened negotiations to cut costs. The group did persuade lenders' to delay until the end of June covenant tests on its £50m revolving credit facility. Should it be breached the facility will be pulled altogether. It is currently looking to negotiate more favourable terms.
The GMB union called for state intervention in the wake of the results. It criticised landlords for overcharging, saying Southern Cross was paying £100m a year over the odds. The GMB national officer Justin Bowden added: "How much longer must the 31,000 Southern Cross residents, their families and the 44,000 staff have the sword of Damocles hanging over their heads before government steps in?"
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