The care homes operator Four Seasons Health Care is on course for a stay of execution before a crunch debt deadline, after its major creditor offered to drop demands rejected by directors.
Last-ditch talks aimed at staving off the worst care homes collapse since Southern Cross were still taking place on Sunday.
But Four Seasons’ largest creditor, US investment firm H/2 Capital Partners, is understood to have made concessions amid pressure from the regulator, the Care Quality Commission, to dispel anxiety around the firm’s future.
Loss-making Four Seasons, owned by multi-millionaire Guy Hands’ Guernsey-based private equity group Terra Firma, has said it may not be able to honour a £26m debt interest payment due on Friday, raising the prospect of the company falling into administration.
Terra Firma has offered to resolve the crisis by handing the keys to Four Seasons over to H/2, led by former Lehman Brothers banker Spencer Haber, which owns the majority of Four Seasons’ £525m debt.
H/2 has so far rejected Terra Firma’s proposals and instead offered a “standstill” agreement that would defer the debt deadline, but only if conditions are met that sources close to the negotiations said last week were “unsignable”.
One of these was that any detailed discussion of Four Seasons’ finances should be followed by a “cleansing statement”, where confidential information is released.
This would prevent H/2 finding itself in possession of non-public information, a scenario that would narrow its options by legally precluding it from selling its bonds.
H/2 also wanted Four Seasons’ directors replaced by an entirely independent board, but is understood to be ready to withdraw or water down the demand.
Efforts to find a compromise are understood to have been boosted by the intervention of the CQC, which has the power to stop care homes accepting new residents.
A deal under which debt payments are deferred for up to six months could be announced as soon as Monday. However, Terra Firma has been excluded from the talks, leaving the likelihood of a three-way deal, not to mention a more permanent agreement, in some doubt.
One major bone of contention is the ownership of 24 care homes that are profitable, unlike a sizeable chunk of the 343 homes that make up Four Seasons.
These homes, says Terra Firma, were accidentally added to the assets over which H/2 has security due to a slip of the pen by the law firm Allen & Overy.
Postponing the debt deadline will allow time for the matter to be settled in court, removing one element of uncertainty from near-term talks over the company’s future.
An agreement would also stave off the immediate threat that Four Seasons’ could be placed into administration, either by its creditors or its directors.
Sources familiar with the talks have suggested that H/2 would have the least to lose from an administration process. The firm owns the majority of Four Seasons’ £525m high-interest bonds, which it bought at a discount for an estimated £260m and which have already yielded £50m in interest.
If administrators are appointed, they would be obliged to secure the best result for creditors, led by H/2. According to some estimates, H/2 could end up sitting on a profit, either on paper or in cash terms, of more than £200m. As one source familiar with the situation put it: “It’s heads they win, tails they win.”
Some observers have warned that an administration could see loss-making homes closed, causing anxiety and disruption for residents and forcing local authorities to fund their continued care.
Labour’s shadow social care minister, Barbara Keeley, called on the government to explain how this would be possible in a worst-case scenario given tight budgets.
She said: “How will councils be able to meet extra demand when they are already struggling under the weight of Tory funding cuts, which will have led to £6.3bn being taken from social care budgets by March 2018?”
“Tory ministers need to come forward with an immediate funding solution, which was called for by the House of Commons recently, and meet the funding gap both for this year and the rest of this parliament.
Administration now looks a more distant prospect but it remains unclear how Terra Firma and H/2 can agree a mutually acceptable permanent solution for the business.
H/2 said it was “working around the clock” to secure a deal and that Four Seasons’ residents and employees were its main priority.
Concern about Four Seasons could reawaken debate about the role of high finance in social care, with the wounds of the 2012 collapse of Southern Cross still fresh.
Four Seasons, which is responsible for the care of 17,000 elderly and vulnerable people, has passed through the hands of a succession of owners, including the Qatar Investment Authority and RBS, all operating a heavily leveraged model.
While Terra Firma cut the group’s debts, the high interest rate on Four Seasons’ remaining bonds – yielding as much as 12.5% – has become unsustainable.
This is partly because spending on social care by austerity-hit local authorities has fallen in real terms, while costs have risen.
Since the Brexit vote, 96% fewer nurses have arrived in the UK from the European Union, forcing Four Seasons to use agency workers who cost up to three times as much.