Southern Cross shares dive 59 per cent on warning

The care home specialist Southern Cross, which said two months ago that it was "well placed to make further progress", announced a profits warning yesterday detailing a litany of problems, and the dismissal of the group's finance director.

The company's shares closed down 183p – 58.5 per cent – at 130p after it cited delays in local authority funding, which caused reduced recruiting and "higher than normal attrition rates of nursing residents". The group will now miss its full-year earnings target of £80m. To compound the bad news, banking cov-enants related to £46m of loans have been breached, forcing Southern Cross to renegotiate terms with its lending banks.

Frances Cloud, a healthcare analyst at Nomura Code, said the statement was an indictment on management led by chief executive Bill Colvin, especially after the group gave no indication of its problems when it revealed its half-year results on 12 May. Ms Cloud said: "The news does come as a surprise, especially given the results came only two months ago. The group should have had some idea on occupancy rates back then and it is an indictment on management that they did not say anything at the time."

Southern Cross reported continuing poor performance at its specialist care subsidiary, Active Care, which was flagged in May.

A spokesman for the group said the statement should be seen as a mea culpa and insisted that Southern Cross was in good shape. The position of Mr Colvin was not in doubt, he stressed. Instead, it was the head of the finance director, Jason Lock, who only started the job in February after serving as financial controller, which was offered to the market. Mr Colvin and other directors had felt early on in Mr Lock's term that the group needed a finance chief with more City experience, the spokesman said.

Southern Cross is highly geared and operates an opco business model: it borrows money to buy care homes before selling and renting them back, repaying the debt. However, the group has been unable to sell recently purchased property due to a fall in market value and because buyers are having difficulty raising funds.

The deadline for paying back £46m of debt has been missed, meaning loans will have to be renegotiated at more expensive levels. Ms Cloud said that this would undermine the group's growth strategy, which combines using debt to buy new businesses and to fund its opco model. The group's spokesman denied the company would have trouble raising new financing.