Business Clinic
LNT’s institutional investor – the future of finance?

Does a new 10-year deal between L&G Capital and LNT Group, owner of Ideal Carehomes, signal a change in care sector financing?

The LNT Group’s Founding Chairman, Lawrence Tomlinson, has been a vocal advocate for the need for sensible financing in business since the credit crunch. As one of two Entrepreneurs in Residence at the Department for Business, Innovation and Skills, he published an independent report in November 2013 which looked into bank lending practices and how certain banks deal with businesses in distress. In April 2013, the Group had negotiated a £100 million refinancing of the business with a collective of banks. With that up for renewal in September 2014, the Group has announced a £51 million debt facility with L&G Capital. As the insurer looks to increase its involvement in the care sector, is this the future of financing?

LNT Group

The LNT Group, chaired by British entrepreneur Lawrence Tomlinson, includes a number of different, and far-reaching companies including the care sector focused Ideal Carehomes, LNT Construction and LNT Software, plus LNT Solutions and Ginetta Cars.

Ideal Carehomes is a care home operator, offering high quality services for older people without any third party top ups. Its homes are mainly across the UK and are designed and developed to be future-proof.

LNT Construction designs and builds care homes, not only for Ideal Carehomes but for third parties too including Anchor, Avery, Sanctuary and Nugent Care. Having built 52 care homes since 2009, with 36 being run by Ideal Carehomes, it offers providers turnkey solutions and is currently working on developments in the south and Home Counties.

The third care-focused company in the Group is LNT Software, an integral care sector software package.

Refinancing

In April 2013, the Group finalised a £100 million refinancing, though the process was not straight forward. At the time, Lawrence Tomlinson was quoted as saying the deal had taken two to three years to come together, involved four different banks and had ‘issues’. He named Santander and Yorkshire and Clydesdale Banks in the process, plus it’s reported that RBS and Bank Leumi were also involved. Mr Tomlinson went on to say that the amount of paperwork involved was ‘phenomenal’ and that the whole process was ‘complicated’.

He has, however, given very positive feedback about several of the banking partners involved in the 2013 refinance. He told CMM, ‘Whilst there were complexities in the 2013 refinance which were costly, and at times challenging, it met our finance needs for 2013 to 14. I found Santander and Yorkshire Bank particularly helpful throughout the past year, and Leumi continue to be a key partner in enabling our care home developments.’ After all this, the deal would have needed to have been renegotiated in September 2014.

With renegotiation on the horizon, LNT Group has just announced a £51 million debt refinancing with L&G Capital. L&G Capital is a new business line created by Legal and General to provide five key functions: direct investments; implementing the investment strategy across the balance sheet; managing the Group’s Shareholder Funds investments and managing the Group’s debt and liquidity. One of the drivers behind the business is the slowdown of bank lending which is leading to a shortage of investment capital. This has led the organisation to focus on replacing bank and Government capital with long-term institutional debt or equity funding, as it has done with LNT.

L&G deal

The deal between LNT Group and L&G Capital, which was announced in mid-May, is a £51 million debt facility, over ten years, to LNT Group incorporating all its subsidiaries. It is secured against the Group’s portfolio of care homes and will give the company the ability to move forward with building a sustainable and growing build pipeline of new care homes. Mr Tomlinson explained the drivers behind the deal with L&G Capital, ‘Our decision to take a debt facility from Legal and General was largely driven by the offer of long-term finance and their understanding of our business model which we believe paves the way for a fruitful partnership for the future.’

Alex Gipson, Lending Manager at Legal and General, said, ‘Organisations that hold enduring business models and that, therefore, operate and plan over medium- to long-term horizons are clearly better matched to external capital that operates over similar long-term durations. For this reason, the financing needs of LNT’s Ideal Carehome business provides a very natural fit with Legal & General’s long-dated pension and annuity liabilities and we expect increasing opportunities in sectors such as the care home market, supporting organisations committed to delivery of long term solutions to meet increasing demand.’

It’s not L&G’s first investment in the care home sector. It acquired 13 care homes from MHA for just over £70 million in December 2013 and it forward funded and purchased five care homes in Suffolk with Care UK for £31 million. These were funded on behalf of Legal and General Property’s Managed Property Fund.

Target Healthcare REIT

On the same day as the L&G Capital announcement, Target Healthcare REIT Ltd announced that it had acquired a portfolio of three homes from Ideal Carehomes for approximately £13.9 million. These have been leased back to the operator for 35 years. The announcement comes just a month after Target Healthcare REIT acquired two other Ideal Carehomes, the first for £3.8 million and another, due for completion in summer 2014, for £5.1 million. In 2013, Target Healthcare REIT also acquired homes from Ideal Carehomes in September for £4 million and £18 million for four homes in March.

Over to the experts…

Given the tough nature of the bank finance market, highlighted by the ‘issues’ faced by LNT in 2013, do these new financing options mark the future for care sector financing? Are more providers going to have to look farther afield than the traditional banks to access finance? Will we see more organisations such as L&G begin to meet the needs of the market, not necessarily being met by the traditional banks? Is this the changing face of care sector finance? What does our panel think?


 

Alternative providers have been fleet of foot

Jon Smart, Partner and Head of Care Team, Freeths LLP

This is, for sure, a very different market than pre-recession. The ‘alternative’ players – institutions, pension funds, private equity investors, international family trust offices, REITS and property companies – were bolder during the recession and have stolen a march on the traditional banks now that the care market (and wider economy) is improving.

According to Colliers’ recent report, the UK care home investment market is heating up and is reminiscent of 2005 and 2006 when keen competition in the main property asset categories (retail, industrial and offices) drove money into other sectors such as care. This time around, these alternative players have generated sufficient activity to push investment yields down by some 50 basis points over the last six months. Anecdotal evidence suggests that by the middle of 2014 yields will have fallen further with several market defining deals in the works.

The speed of the recovery has left the banks behind, a bit. The alternative providers have been fleet of foot in taking advantage. For now they are doing all the headline deals. But with stability and growth returning (and the irresistible demographics of an ageing population underpinning the care market) so will the banks. They will have to be competitive to regain market share from the new players, who are here to stay. So in the next year or two I see the care funding market being a plural blend of providers with more choice and competition than ever before. This will be good for the market and, ultimately, the economy.

The debt facility with Legal & General will support LNT’s plans to build between six and eight new care homes and create around 500 jobs a year. Freeths acted for LNT on the L&G deal and all of the Target Healthcare sales and leasebacks. We are delighted to have helped LNT realise these deals as it is this kind of dynamic company and many like it that will create the jobs to make the recovery a reality for everyone.


 

Can be attractive for certain businesses

Steve Roe, Corporate Banking Relationship Director, Yorkshire Bank 

Clearly this type of institutional debt funding can be attractive for businesses with a particular need, in certain circumstances. The debt required would usually need to be of a significant size which most care operators possibly won’t require. Larger operators who are more complex in structure and often have more complex funding requirements over longer terms may find this attractive.

Every lending decision is different depending on the requirements of the customer but our experience is that bank funding remains an attractive option for the majority of care home operators because of its flexibility, terms and relative speed of being made available.

At Yorkshire Bank we are continuing to see strong levels of demand across the UK and have supported a growing number of new and existing customers looking to refinance or provide new development funding.

After talking to a lot of healthcare operators, our own research is suggesting that businesses are looking to the future with confidence in the UK economy and confidence in their ability to grow.

The vast majority of healthcare businesses we’ve spoken to said they plan to make a significant investment in the next year. Many are looking to improve their existing assets, develop new services or move into new markets.

Traditional banking services have a role to play alongside long-term institutional investors who maybe don’t provide day-to-day or specialist banking services, or flexible funding for growth opportunities.

As the economy continues to show signs of improvement, we are seeing growing numbers of care home operators looking to invest in their businesses for the future and we are ready to help realise those ambitions.


 

A first, but certainly not a last for the sector

Philip Hall, Chairman-Healthcare, JLL

The decision by Legal & General Capital to provide £51 million of long-term debt is good, not only for the LNT Group, but also for the wider industry.

It is a vote of confidence by one of the country’s top insurers in the economic fundamentals of the sector. It may be a first but will certainly not be the last such offer from a major insurance/pension provider. Companies like Legal & General are natural providers of long-term financing given their long-term annuity liabilities.

These deals that the LNT Group have been able to conclude reflect the focus they have on providing cost-effective, quality care on a consistent basis across their portfolio.

Target Advisers identified Ideal Carehomes and the LNT Group as excellent long-term partners some four years ago, when their product was less recognised for its enduring features, and Target Advisers continue to show faith in its fundamentals.

The sector needs a long-term and moderate approach to its financing needs from a variety of sources including banks, insurers and Real Estate Investment Trusts (REITS); but this is only likely to be delivered sustainably on the back of a deep commitment by healthcare providers to quality, and long-term financial stability, with credible and sustainable base costs and fees which are sufficient to deliver quality care.

As the market recovers it is easy to forget the lessons of the last few years. Healthcare should never be a short-term play in financial engineering.

Successful lending and borrowing requires a long-term commitment and an alignment of interests.

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