Is the hand of the state quietly keeping Southern Cross afloat despite strong denials from the Company that any approach has been made to the treasury for a bailout?
On the surface there appears to be very little difference in the financial difficulties faced by Von Essen and Southern Cross. Both have breached or are close to breaching their banking covenants and so why have Von Essen been put into administration and Southern Cross struggles on?
The cynical amongst us familiar with private finance initiatives and operating in the corridors of government might care to speculate that there are two main differences.
The first reason is that the assets of the Von Essen group are clearly defined attractive trophy assets that will appeal to international investors who are now seeing UK as “cheap” for commercial property assets and this gives the lending banks the opportunity to realise a proportion of the cash owed no doubt at the expense of unsecured creditors.
The second reason is that Von Essen is not a people issue largely brought about by successive government actions as well as inept private sector management. Southern Cross fixed most of the rents it pays to landlords five years ago, and they are now rising faster than the fees it receives for residential care. This is because the government is forcing local authorities to extract better value from residential care to the point that the whole sector is becoming an economic mess.
Any job losses (or ’cuts’ in political jargon) at Von Essen will be camouflaged as they will occur in secondary support businesses, are widely spread geographically and more difficult to identify. ‘Cuts’ by Southern Cross would involve little old ladies being turfed out of their homes and widespread job losses of the staff, lurid newspaper headlines (“Survivor of Normandy Landings victim of Southern Cross!”) a major cost to the public sector in rehousing and bad publicity. In reality the government will keep Southern Cross going as it is the cheaper option for them.
Stuart Parker of Sirius Business Law commented that “With 31,000 residents in 750 homes around the UK, Southern Cross cannot defy gravity in a falling property market with a declining income. A resolution is needed and whilst we will get denials from Whitehall, the hand of government will not be far from the tiller. Economic pain will be experienced by all concerned but it should not be at the expense of the helpless occupants. Let us hope that the coalition government extracts a high price from Southern Cross in return for the taxpayer pounds that they may receive to bail the business out of this disaster, created by their management decisions”.
Southern Cross has been hit by public sector cuts, with the overwhelming majority of its residents local authority or NHS financed and the gravy train has hit the buffers.
Cuts have already been responsible for a drop of nearly 15 per cent in local authority admissions to the group’s homes, while the company is presently paying around 22p of every pound it makes on rent.
Southern Cross management appears to be in cloud cuckoo land but believes that rent renegotiations are fair because agreements, some for 30 years, were agreed in better economic times when the valuation on properties was higher. It is understood that the group continues to meet its landlords as it continues to push for the rent reductions but why should Landlords yield? Perhaps the senior management should have a whip round and repay the company some of the fat salaries and bonuses paid to them at the time when they were happily sowing the seeds of the company’s current destruction.
Await a feeding frenzy from business lawyers brought in to sort the mess out and perhaps Prince Andrew might know a friendly Sheik or two, although if I were them I would find the Von Essen assets much more attractive. It is interesting to note that Southern Cross has recently appointed an upmarket business lawyer to its board as the head of debt refinancing.
Author: Chris Slay
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