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Rating agency Fitch downgrades UK Care home bond to junk status

Southern Cross Healthcare still causing problems even after its demise
2013-02-28 19:19:52 -

Titan Europe 2007-1(NHP) Ltd bond now at junk status as not even interest payments being serviced

Southern Cross' corpse leaves the grave and starts biting successor HC-One

Titan bondholders could be headed for a freezing cold bath while outlook for British care home operators looks decidedly bleak

An innocuous looking report into a multi-million pound bond issued in Ireland 6 years ago points

the way to a major crisis in Britain's care home industry

The report, which is by way of a press release from credit ratings agency Fitch, explains why it [Fitch] has downgraded most of the notes in the bond issued by Titan Europe 2007-1(NHP) Ltd (the "B", "C", "D" & "E" notes) to that of junk bond status, giving them a CCC rating which is their lowest.

This while another ratings agency, Moody's, has issued a warning on the remaining note (the "A" note), downgrading it and declaring it as "speculative".

This bond, which totals a mouth watering £638 million is due to mature in 2017, and had stopped interest payments already when still linked to the now departed calamitous Southern Cross Healthcare care home operator (SCH). The bonds were issued on behalf of Nursing Home Properties (NHP) which was part of SCH, but then became one of SCH's largest landlords in a controversial finance deal and is now morphed into HC-One care homes group as a wholly owned subsidiary of NHP. HC-One is currently the UK's third largest care home group.

HC-One in particular, and the British care home industry in general, are looking sick, mainly because of lower than expected occupancy rates, rising costs and with such a tight squeeze on revenues that they have dropped in one year (for HC-One) by 20.6% (£102.5 million (December 2011) to £81.3 million (December 2012)).

What has also been brought into focus is that in a month's time, the British governent are going to release what fees they will pay care home operators where they, and local government, pay for the care of the elderly, infirm and disabled in the now wholly privatized care home industry. This is particularly relevant as about 80% of the residents of care homes in the UK have their fees paid by the public purse.

There have been hot tempered discussions between the care home industry and the government in consultations on this subject (see statement from Martin Green of ECCA below).

There is a not so small matter for the bond holders of the actual value of the properties themselves, reminiscent of the US sub-prime fiasco of a few years ago which was the main reason for the present global financial crisis. This is because the bonds are backed in the final analysis by the value of the properties in the portfolio. The Fitch report states that the Loan-To-Value (LTV) ratio of the properties is extremely bad; stating that:

"Under the current market valuation, the LTVs have increased to very high levels, with all rated classes over 100% i.e. 135%, 143%, 154% and 165% for the B, C, D and E notes".

Cutting through the financial jargon, this means the properties are not worth anything as much as when the original bond was issued, so as the bonds were supposedly backed by the value of the properties, the bonds are not covered totally by the asset value.

These prices have fallen through the floor, not helped by the general financial crisis and which has been added to by uncertainties in the market for British care homes.

For the full story and copies of the Fitch and Moody's reports and a statement by HC-One, click the link below: ..

Adelaida Bulaon
Telefon: +44(0)7864 114486

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