Fitch: UK Care Homes under Pressure from Local Authorities Fee Cut

Fitch Ratings says in its latest European Leveraged Finance Highlight that UK care homes exposed to local authorities' funding are under pressure though the outlook for each credit can vary.

Since 2011, the UK's leveraged care home sector has suffered from a real-term reduction in local authorities' fee rates. Operators' resilience varies according to their position on the acuity care spectrum. Care homes at the higher end of the dependency spectrum such as Voyage (B/Stable), with a larger share of disability care, are relatively resistant to the funding cuts of local authorities. Care homes more at risk will be those catering for residents with less complex needs such as Elli (Four Seasons Health Care, 'CCC') and Care UK.

The introduction of a National Living Wage from April 2016 adds uncertainty and risk to the sector. If the current trend of care homes closures persists, significant capacity constraints will develop and local authorities may be forced to find extra resources.

UK care homes operators funded by local authorities contrast with those funded by NHS, which so far are protected from a cut in fees and benefit from a positive momentum driven by an ongoing trend of outsourcing by NHS. Acadia Healthcare's latest acquisition of Priory Group at an EBITDA multiple of around 11.8x (LTM September 2015 EBITDA) is evidence of market differentiation based on fee sources.

Fitch's European Leveraged Finance Highlight series analyses trends in the high yield and leveraged finance markets and the factors to watch in the near term.