Funding
through the next 12 to 18 months, however, lenders will hope to see occupancy levels returning to pre-pandemic, more consistent levels.
In September 2021, Boris Johnson
announced his plans for providing further support to the care sector by reintroducing a ‘care cost cap’ and pledging increased government spending in the sector, from the estimated spend of £12.1bn in 2019/2020, by approximately £5.4bn through the 1.25 per cent health and social care levy.
Despite government payments over the past 24 months, and amidst the care review, average weekly fees have not increased in line with the real increasing cost of care. Lenders have gone back and forth on their preference for either predominantly local authority or private residence with no real clear policy. The best way to discuss income with lenders is with a level of consistency over the years, supported by accounts, occupancy, local demand, and microeconomics.
Income can also be linked to various components such as room numbers – should this be 25 beds plus? 100 per cent complete with en suites? typical room size? As larger lenders push for higher bed numbers and ‘better quality assets’, this results in smaller homes becoming more challenging to fund despite remaining highly profitable, which is a gap in the market where alternative or less well- known lenders can bring their support. With all the challenges and negative noises that resonate from this sector, now is probably the best time to make decisions on what the next steps should be for operators and their businesses.
Something that has not changed over the
past two years is the UK’s ageing population, and the demand for social care accelerating faster than supply. It is estimated that, by 2039, one in four people will be aged 65 or over, with dementia and other complex needs occurring earlier, and with pressure on the NHS and adult social care continuing to increase. This level of demand remains strong, attracting foreign investment (in the form of REITS), and providers who are looking to enter the UK market. There are also several large-scale care operators
looking to develop and acquire land or closed homes in order to build new purpose- built, future proofed homes. The future of funding within the sector may cause lenders to adapt to policies and seek a more leasehold-led environment.
Funding
In my opinion, there are two types of funding to consider: expansion finance or consolidation. You can combine these two to increase your income or to strengthen your business; however, you are either going to be seeking finance to acquire your first care home or to expand an existing portfolio. Alternatively, you may be looking to consolidate your position to improve your cash flow or to release capital for refurbishment purposes, with both benefits enabling you to strengthen your portfolio. However, looking at the market to potentially acquire a business is more common. When deciding to take the next step to acquire funding, it is vital to be well- prepared and to be aware of the types of information required by lenders when they assess an application. Now, more than ever, lenders undergo in-depth analysis into the financials of a business. Having been challenged hard by lenders and their underwriters, we have witnessed, over the last 24 months, a greater need to know a care business’s financials and plans inside out. These regular battles between client, broker, and lender are a daily occurrence which can cause frustration in any transaction. Having a supportive team around you which understands the sector and the financial market can pay dividends. With some negativity and concerns within the care sector, lenders now take a very cautious approach in choosing who to support and the quality of the lending package offered. Everything that has been alluded to needs to be considered, along with several other facets that will be a focus of attention from lenders.
Looking forward, operators will need to take stock of their businesses from the past 24 months, which will help them focus their minds regarding any depression or recession periods. Consider
Lenders with experience of regulatory issues can help build confidence during the process as well as a common-sense approach to accompany your robust plan
June 2022
www.thecarehomeenvironment.com
focussing on future acquisition plans, expanding business portfolios, pursuing refurbishment, or restructuring routes. All of these options would require brave decisions on the best and most helpful way to fund the process; through reserves, cashflow, or by borrowing. Many lenders have now moved to also
being ‘expert’ relationship managers in specialist care markets and have been able to provide improved support to their clients. This can be a huge positive for operators who are looking to achieve their business ambitions. However, funding decisions will ultimately be based on the bank’s risk or credit policy which will then impact on the appetite and ability of any lending support for an operator.
With the challenges mentioned above, it is no surprise that the funding process has become far more protracted as the time taken to achieve credit-backed offers of finance has become longer. However, managing expectations throughout the process can help to improve efficiency and pull transactions together, which can be crucial in an acquisition process especially. There are always many moving parts to a transaction and therefore keeping all parties informed throughout the process will help to maintain progress.
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Jimmy Johns
Jimmy Johns has over 21 years within the financial services and banking sectors, with 15 of these years spent working in commercial banking. Over the past six years, while working for specialist commercial finance broker Christie Finance, Jimmy has specialised in the healthcare sector. He has supported a number of clients on various transactions, ranging from first-time buyers, large scale expansions, portfolio acquisitions, and Management Buyouts (MBO).
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