Recent history hasn’t been great for Four Seasons Health Care; regularly hitting the headlines connected to financing. Since the collapse of Southern Cross Healthcare in 2011, it has been seen, by some, as the next in line for difficulties. The sector’s major provider, it supports around 20,000 people across its three, newly-divided and clearly-defined brands.
Four Seasons Health Care, which focuses predominantly on the local authority market; brighterkind, it’s growing self-funding brand; and The Huntercombe Group, which offers high complexity, hospital services.
Late April saw the publication of the annual report and financial statements for Elli Investments Limited, Four Seasons Health Care’s parent company. The figures making the headlines are: operating loss – £263.6m; gross profit – £51.1m; and net debt – £509.9m.
In November, credit rating organisation Standard & Poor’s said that the company’s financial structure was unsustainable in the short-term, suggesting the provider risked running out of money within 2016. Moody’s followed suit with a similar outlook at the end of April.
Writing in the Chairman’s review of the results, Robbie Barr, who recently took over the position from Ian Smith, addressed concerns over the company’s financial structure. He explained the company’s plans. ‘Whilst the group’s cash position, operational strategy and anticipated disposal proceeds will ensure that the group has adequate financial resources and liquidity for the medium-term, I recognise that the group’s capital structure is not suitable for the long-term needs of the business. The business recognised this last summer and appointed advisers and my goal is to ensure that we work with the group’s stakeholders to reach a capital structure which results in the group being well-positioned to fulfil its potential for its residents, staff and providers of capital. In this regard…FSHC Group Holdings Limited and advisers have started the process of engaging with key stakeholders and we hope to resolve the capital structure of the group during the course of 2016.’
No-one would argue that the sector is in a difficult period. Pressure is mounting on all providers, but especially those supporting people under local authority contracts. There are a number of well-documented factors contributing to this; continued underfunding of care through local authority fees – which Elli Investments reports to be 15% below the LaingBuisson fair price for care calculation; the national shortage of nurses, leading to an ongoing reliance on agency staff; the National Living Wage, which although only just introduced and therefore not impacting on these figures, will have an effect in 2016.
Added to this, Four Seasons also faced a drop in occupancy, which the report says has been affected by a record number of winter deaths.
There’s more to a company than its financials, and Four Seasons is aware of the long-term needs of the business. Not only, as mentioned by Robbie Barr above, has it started a process of looking at its capital structure, it has also taken numerous operational steps. It has separated the group into three brands. Four Seasons Health Care, brighterkind and The Huntercombe Group are all operating as independent businesses. Doing so has enabled each to focus on its core clients.
Four Seasons Health Care has concentrated on improving quality, which has resulted in only three homes being under Care Quality Commission embargoes, the lowest level for nearly three years. Added to this, the organisation is getting involved in other sector developments. Four Seasons Health Care has been working with the NHS to open up more care home beds to help tackle the issue of delayed transfers of care. It has between 350 and 500 patients at any one time, who have been discharged into its care homes under intermediate care.
It has also introduced a 24/7 rapid response assessment and admission services. This service is aimed at helping hospital discharge teams, clinical commissioning groups and social workers to help find appropriate placements for patients to enable quicker discharge or avoid admission in the first place.
brighterkind has refurbished a number of homes and is rolling out three ‘signature elements’. These are ‘high standards of personalised care; an enhanced recreation and activities programme that supports physical and mental wellbeing and is enjoyable; together with a superior food and dining experience. The business has also introduced a caring partner scheme, which is aimed at providing value added services to its residents including vision and hearing tests.’ It reports that its agency payroll has also reduced and average weekly fees have increased.
The Huntercombe Group has progressed with re-provisioning services from adult services to child and adolescent services, as well as having withdrawn or scaled back its learning disability services. It has also rolled out an electronic patient record system at key sites to reduce the burden of record-keeping.
Over to the experts…
Clearly, Elli Investments has to find a suitable financial structure for the long-term. The company’s substantial debts and operating losses cannot continue. However, there is an acknowledgement of the issues and already action in place to address the situation. Will this be sufficient to safeguard the business for the future? Will the Care Quality Commission need to step in under its market oversight role? Also, are the operating changes enough to help keep the different brands moving forward? What does the panel think?
A problem without an obvious solution
Four Seasons is a sprawling corporate empire made up of over 150 companies, with its top company offshore in the Cayman Islands and its ultimate owner, Terra Firma also offshore, this time in Guernsey.
So far as it’s possible to tell from these opaque arrangements, this is a classic private equity structure, involving the minimum of fixed equity capital and the maximum amount of debt.
This financing model is designed to multiply the investment return for the owners and is fine, in financial terms, so long as it is supported by a profitable business, which can generate the cash to service the debt mountain.
Unfortunately, Four Seasons is clearly not profitable and two of the world’s leading credit rating agencies have now warned that the debts are unsustainable unless there is a major restructuring. This process will involve delicate negotiations with stakeholders, who will have to be persuaded that the profitability issues at Four Seasons can be resolved.
This is not just about re-jigging the debts to cut the interest bill and reduce the cash flow strain from loan repayments.
Much more fundamental commercial and operational changes are needed to make the business viable; under the current circumstances it’s very hard to see how it can be returned to profit.
There is a limit on how much higher fees for privately-funded residents can be hiked, fees for local authority residents are capped by budget constraints and costs just keep rising, the latest pressure coming from the National Living Wage. Right now, this is a problem without an obvious solution.
Nick Hood Business Risk Adviser, Opus Restructuring
A crisis much bigger than the care sector
It seems likely that Four Seasons Health Care represents the highest profile (and largest) manifestation of a crisis in the care sector. A crisis which has been happening for some time.
Arguably, we didn’t really need market oversight to identify it. It is a slow-motion crash, perhaps five years in the making. The fundamental problems faced by the care home sector were not resolved when Southern Cross collapsed in 2011. In fact, many of the difficulties Four Seasons Health Care faces are rooted in the earlier financial crisis.
The strategy outlined in the article of segmentation, specialisation and diversification is occurring across the social care sector and for most social care providers.
Creating smaller divisions can improve management and quality, although it brings with it higher costs. However, all the facts of the situation are detailed in the article: fee rates – on both the local authority and private pay side – have sustainability problems; occupancy (related to fees and efforts to keep people out of care homes); tougher regulation; rising staff costs; staff retention difficulties, all of these together with the reputation and perception of the care sector.
I’m not sure that re-provision will be sufficient to tackle them. They all add up to an ever-more challenging time for care providers or a ‘perfect storm’ to use the easy cliché. It is a cliché with an assured truth. However, this is a crisis much bigger than the care sector, it will have ramifications across healthcare and the NHS, for informal carers as well as people in need of care and support.
Des Kelly OBE Executive Director, National Care Forum
Are debt-based structures in the public interest?
Four Seasons has become the poster boy of the funding crisis in residential care. Margins are being squeezed by local authorities and big chains complain that they are not being paid a fair price. But critics argue that the problem is debt-based financial engineering, so local authorities are putting money into a leaky bucket.
The Chairman now observes ‘the group’s capital structure is not suitable for the long-term needs of the business’. The more general question is whether debt-based structures are in the public interest?
Our recent public interest report Where does the money go? explains what debt-based financial engineering means and how it works in care. We conclude that private equity owners believe a fair price should give them 11 to 12% return, which would cover buying the chains at eight or nine times earnings. Some chains are financed with debt, interest payments are non-taxable but profits are taxed; the rates of interest are high on external bonds and internal debt; cash is routed through multiple jurisdictions; and limited liability is gamed to compartmentalise risk of failure, which is increased by the capital structure.
In this case, there is £525m of external debt at 10%, which has a cash interest cost of around £50m; and another £311m of intra-group debt at 15%. This incurs another charge of nearly £50m before any profit can be found. Beyond that, matters are complicated, because its care homes are part of a group of 185 companies, tiered in 15 levels. This kind of debt-based financial engineering may have its place in high-risk, high-return activities; but we believe it is completely inappropriate in care, where it should be a low-risk, low-return activity.
Diane Burns Lecturer in Organisation Studies, Sheffield University Management School, University of Sheffield and Joe Earle Research Associate, Queen Mary University of London