Southern Cross hit by fresh debt blow

By This Is Money
Updated: 06:47 EDT, 11 June 2011

The crisis engulfing the UK's care homes has deepened after NHP, the largest landlord to Southern Cross, had its £1bn of debts downgraded to junk.

Landlords: Property baron Nick Leslau has called for current Southern Cross management to be ousted

The news on NHP, which owns 270 homes which it has leased back to Southern Cross, piles on yet more agony for the care home group's 31,000 frail and elderly residents and their families.

The survival of Southern Cross - which depends on its 80 landlords - now hangs by a thread.

The nursing home company last week imposed a 30pc cut on rent on NHP and its other landlords until September in a desperate attempt to avoid bankruptcy.

NHP supports its efforts to stay afloat but is itself heavily indebted with borrowings of more than £1bn.

The downgrade of its debt to junk status by leading credit rating agency Standard & Poor's will make it much harder for both companies to claw their way out of financial trouble.

Industry experts have already warned that by cutting rents, Southern Cross could spark a domino effect sending the landlords into administration.

Standard & Poor's said it is taking a bleaker view on the NHP debt because of 'heightened' risk due to the troubles of Southern Cross.

The agency added that the 30% rent cut could lead to a 'shortfall' for NHP that put the property group at 'real risk' of being unable to meet its own obligations under the complex terms of the loans when its next interest payment date falls due next month.

Southern Cross is hovering on the brink of ruin with losses of £311m and a crippling rent bill of £250m a year.

Its former private equity owner Blackstone quadrupled its investment by floating it on the stock market in 2006, but left the company with a controversial sale-and-leaseback model that proved incapable of weathering the economic downturn.

At the time it owned Southern Cross, Blackstone also owned NHP. It made hundreds of millions of pounds more profit on top of the huge gains it gleaned from Southern Cross by selling NHP in a £1bn deal to Royal Bank of Scotland.

Other big landlords include the UK's second biggest care home operator Four Seasons, which is also in deep financial straits. State-backed bank Royal Bank of Scotland owns a large stake.

They also include property baron Nick Leslau, who partowns Saracens Rugby Club and who has called for the current Southern Cross management to be ousted.