There's nothing new about privatisation and asset-stripping. But capitalism has broken new ground with the threat to tens of thousands of nursing home residents...
Southern Cross Nursing Homes may not be quite so prominent for a while in the headlines, but don’t be deceived: this story has not run its course. More importantly it has opened the window on a whole sector in jeopardy.
Southern Cross has until Oct 2011 to devise a solution to the problem of its debt-ridden company which is threatening the livelihood of the 31,000 elderly residents. The four-month process will be overseen by a “restructuring committee” consisting of representatives from the company and its 80 landlords. By the end of the process it is anticipated that Southern Cross will be operating under a different name and will only have between 250 and 400 of its current 751 care homes. Paul Burstow, the health minister, has said that the government will not allow any residents to be left homeless or without care. However he also told the House of Commons (with no sense of irony):
"This is a commercial sector problem and we look to the commercial sector to solve it. All the business interests involved fully understand their responsibilities."
A remarkable statement given that it was that very sector who created the crisis with more than a little help from key figures in the Blair, Brown and current administrations – a rich vein of rottenness which deserves close examination.
The residents are already experiencing a catastrophic reduction in care. On 8 June, 3000 nursing and care staff who worked for Southern Cross found their jobs publicly axed as the company took desperate measures to stay afloat.
In the headlines
Southern Cross first came to prominence in the national headlines in 2010 after BBC North East ran a programme critical of the care standards in some homes. The public response to the programme was unexpectedly large and the concerns about care quickly expanded to concerns about financial standards.
The company was set up in 1996 by a businessman named John Moreton who had made big money in his twenties during the North Sea Gas boom. By 2002 the company had 140 sites and at this point a German-based venture capital firm WestLB bought Southern Cross for £80 million. Only two years later US private equity firm Blackstone bought the company, which by that stage had 162 care homes, for £162 million. From £80 million to £162 million in two years! What was going on? In short Blackstone thought they were on to a winner with increased lifespans and local authorities (i.e., public funding) paying for places in nursing homes when people either did not have the funds to pay for their own place or outlived their own funds.
Blackstone’s expansion plans continued. It went on to buy a property company called NHP in a £1.1 billion deal and then NHP leased 192 homes to Southern Cross. Further acquisitions followed which turned Southern Cross into the largest nursing home operator in Britain. At this stage they owned some properties and leased others.
In March 2006 there was a flotation of Southern Cross on the London Stock Market. Initially Southern Cross performed well and indeed doubled its share price during the first year. This was a huge benefit for Blackstone, which sold its stake in the company in March 2007 and managed to get out and make a killing before things went belly up.
Forest Lodge, a Southern Cross care home in Walthamstow, east London, for people with dementia: it was taken over just before the company got into trouble. Officially opened in April, its entrance is still blocked.
Along came the financial crisis of 2008 and suddenly the expansion strategy of Southern Cross was revealed for the entire world to see. The company had been buying properties and selling them on again but keeping a long term lease in order to keep running those properties as nursing homes. It no longer owned its nursing homes – the landlords did. Our public money for care of older people had been directly channelled to property speculation. (Workers readers will recall articles we wrote in this period about Private Finance Initiatives in the NHS, where public money came nominally to the NHS but was going out the back door to the PFI consortiums.)
Then the Southern Cross strategy came unstuck. It could not find buyers for its property assets and found it could not meet a £43 million loan repayment deadline. And just like anyone else who can’t pay their debts, it found those debts grew and grew. News of the company’s difficulties reached the City of London and its share price crashed from over £3 to £1.30 in a single day.
Southern Cross tried to negotiate a new deal with the banks to ride out the storm. But the reductions in local authority funding planned by the Labour government and confirmed with Cameron’s election in May 2010 meant less public money for care of older people. Southern Cross had tied itself into renting arrangements that ran for 25 years, and these are subject to yearly upwards-only rent reviews. It pleaded with its landlords for rent reductions in line with current prices, but this was refused. Then it made its own decision to cut those rents by 30 per cent (and many ordinary people stood by and said “oh if only we could be so lucky”).
So the fate of Southern Cross residents now lies in the hands of the landlord known only by three letters NHP, as it is the largest landowner, owning 249 of the homes. But NHP has also borrowed far too much and is currently controlled by its creditors. These creditors are in turn coordinated by the outsourcing firm Capita.
As can be seen from the Table (“Profiting from destruction”, below) a number of firms in the City of London, like vultures feeding on a corpse, are still making money from this crisis. But the role of one individual needs a little more scrutiny as he had a key role in the flotation, following a key role under Blair and Brown, and now under Cameron.
Who is benefiting?
KPMG, legal giant Clifford Chance and City Investment Bank are involved in the “restructuring process”. The three companies already took £2 million a month in fees between them during the “restructuring”. KPMG is also the internal auditor for the Care Quality Commission, the government’s Care Home Regulator.
PR firm Financial Dynamics: represents at least four of Britain’s biggest elderly care providers. Currently earning fees from Southern Cross – amount unknown.
Who has benefited?
House brokers UBS and Morgan Stanley. Shared some £10 million in fees when the firm was floated in 2006.
Between 1999 and 2003 a certain Jeremy Heywood was a civil servant working for the then Prime Minister Tony Blair as Principal Private Secretary. He then took a break from the Civil Service and went to work for investment bank Morgan Stanley where he was co-head of UK investment banking between 2004 and 2007 heading up the team that was involved in the controversial stock market flotation of Southern Cross in 2006. It is not clear how much of a personal bonus Heywood was paid for overseeing the Southern Cross float. Normally in banking circles leaders of such teams would have received a huge bonus.
Morgan Stanley advised Blackstone on the float, acting as the guide through Stock Exchange rules and crucially setting the share sale price and attracting investors. The 2006 float valued Southern Cross at £425 million and released huge profits for directors and for Blackstone.
Before the proverbial hit the fan, Heywood was brought back into Whitehall by Gordon Brown. He is now David Cameron’s permanent secretary and tipped to be the next Cabinet Secretary.
Another former aide to Tony Blair between 2001 and 2005, Baroness Morgan of Huyton, also took up a post as a non-executive director of Southern Cross in June 2006. In February 2011 she was named as the new head of the education inspection body Ofsted.
The tip of the iceberg?
The question now arises of how many nursing homes in Britain are in the same state as Southern Cross. There are hardly any family-run homes left, a small number run by charities and very few beds for this type of resident in the public sector.
In trying to get to the bottom of Southern Cross’s finances, it has been discovered that Bondcare, which runs 30 care homes in addition to owning 39 of Southern Cross sites, does not even file accounts in Britain. It is not possible to assess its financial position as it has a secretive ownership structure based in Gibraltar. How convenient are British Crown Dependencies for financial capitalism!
So here is a story involving one of the most senior civil servants, the Head of Ofsted, Capita, a Crown Dependency and the channelling of public money in the form of nursing home fees to this basket of rottenness. This tangled web must be explained to any one in our class who will listen.
And then the only question is, why to do we tolerate this? ■