Interest rate rises hitting embattled care home finances hard

Interest rate rises hitting embattled care home finances hard

August 3, 2023


A wide-ranging article this week in the Financial Times highlighted the plight of care home finances as operators struggle with surging interest rates. The article quotes a number of sector experts warning that care home closures will inevitably rise, putting further pressure on the sector’s capacity just as demand is rising from an ageing population.

Variable rate finance

The article makes a particular point, which is highly relevant to prospects for care home operators. Unlike homeowners with fixed rate mortgages or other businesses with fixed rate term loans, it has always been difficult to obtain fixed rate finance for care homes. Consequently, the great majority of mortgages and other facilities used by operators are on variable rate terms. So, the repayment crisis is already wreaking havoc with care home finances.

Care home finances

We published a detailed report into the finances of the residential care sector this month, which can be found here. This revealed the following key financial issues for care home businesses:

  • The sector borrows £6.9bn
  • 28% of operators are in the Company Watch Warning Area, indicating a one in four chance of filing for insolvency within three years
  • 20% of operators are ‘Zombie’ companies with negative balance sheets
  • 23% of operators have negative working capital
  • Every resident funded by local authorities (41% of all residents) loses the care home that houses them an average of c.£200 per week.

The combination of this adverse profile with soaring interest rates, staff vacancies and ongoing pressures from sky high energy costs and other input costs makes the sector exceptionally vulnerable.

Care home debt

Of the total £6.9bndebt, £700m is short term and the balance of £6.2bn is long term.

75% of care home businesses have no debt. Ranking the remaining 4,030 businesses, shows the following exposures:

Debt range                  Number of companies

Under £1m                             3,262

£1m – £5m                                 577

£5m – £10m                               106

£10m – £50m                               63

Over £50m                                    22

Debt risk

There are two fundamental problems here, at the top and bottom ends of the borrowing spectrum. The assumption is that the 22 largest borrowers are all substantial businesses, better able to support and service their debts. If this is not true, the failure of any one of them poses a systemic threat to the entire residential care system because of the sheer number of residents each one of them cares for and the lack of alternative accommodation for such larger numbers. It’s worth noting that 5 companies have borrowings of over £250m each and another 5 have borrowings of over £100m.

The 3,839 businesses borrowing under £5m are likely to be where any future failures or closures will be concentrated because of their more restricted financial resources and inability to withstand hugely increased interest costs. Historically, relatively few care home operators file for insolvency, usually well under a hundred per year. The concern is what happens if five hundred or a thousand go out of business? How would local authorities cope and is there sufficient capacity to absorb the displaced residents?

Care home finances in Scotland

There different funding arrangements for publicly-funded residents in Scotland, where there has been a long-established agreement between the Scottish government and Scottish Care, which represents independent operators. For many years, the rates paid by councils have been set by the National Care Home Contract (NCHC), guaranteeing a profit of 4% for independents.

Unfortunately, renewal negotiations of the NCHC this year initially broke down over the meagre 6% uplift offered, which was manifestly inadequate in the face of rampant cost inflation and the obvious need to raise staff pay rates to address growing vacancies. Ultimately, Scottish Care has been forced to accept the 6% offer, but there are reports that care homes in Scotland are now closing at the rate of at least one a week in a sector already short on capacity, a crisis that is expected to worsen significantly.

Our analysis of the finances of Scottish-registered residential care companies shows a healthier position across a wide range of measurements. Their average H-Score is higher than the rest of the UK – 53 out of 100, compared to 49. Just 14% are zombies (vs. 20%) and 25% are in the Company Watch Warning Area (vs. 28%). These less negative statistics reflect the greater support until now for independent operators, but they are bound to deteriorate as this year’s NCHC settlement bites into the profitability of Scottish care home businesses.

What next for care home businesses struggling with debt?

There is no silver bullet, but taking professional advice as soon as problems emerge is essential. There may be a restructuring solution, which sector experts can help businesses find and implement.


If you are a care home operator that is looking for professional advice, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.

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