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					Four Seasons Care Homes

Viability Analysis

Prepared by Impact Change Solutions
Barry Scarr and Paul Johnston
August 2011

                                Page 1 of 12
The West Midlands Joint Improvement Partnership Mobilising Community Capital Programme
(MCC), delivered by Impact Change Solutions Ltd., has been examining provider risk and viability as
part of the market shaping work stream. The recent issues surrounding Southern Cross Healthcare
have added extra impetus and focus to this area, and ADASS have requested that Impact Change
Solutions apply the viability model developed as part of MCC to some of the bigger Southern Cross
Landlords who are emerging as potential replacement providers. This paper looks at Four Seasons
Healthcare (FSHC), who recently generated headlines about financial instability within their
operating model.

Executive Summary
Four Seasons has expanded rapidly from a small base, and in the mid to late 2000’s took on a huge
amount of debt as a result of private equity and leveraged buyout deals. These were common at the
time, but they are now being questioned:

Jon Moulton, of Better Capital, said care homes were "uncomfortable assets" in the private sector.
"The more you [load] them up, either with debt or with rent, the riskier they become," he said.
"These are quite substantially about doing good, caring for people; profit-making may be helpful in
getting some people to do it but on the other hand somebody who pushes too hard for profit clearly
will be down-playing the caring requirements."
Private care-home operators should instead be treated like a power or water company and
regulated as such. "I actually think the only thing you can do – and this is against my natural gut
reaction – is to make sure this business is sensibly regulated in line with a sort of regulated utility."
Guardian, 11 July 2011

This quote is particularly pertinent as Moulton’s previous company, Alchemy, had owned Four
Seasons up until its first sale in 2004.
The debt accumulated by Four Seasons, and its punitive nature, combined with the cutbacks in
government spending, have created a precarious financial model for Four Seasons. The debt has
been partially addressed by Royal Bank of Scotland taking a 40% stake in the company in return for
reducing the debt from £1.55bn to £780m, but short term risks are still high as the remaining debt
needs to be rescheduled by 2012.
At face value, the care home operation seems to be viable. However, some of the indicators are not
as positive as they should be:
       Overall return on capital is low and reducing, down from 2.2% in 2007 to 0.9% in 2008 and
        just 0.3% in 2009. This is barely above the amount that would be available from an ordinary
        bank savings account.
       Occupancy levels are a key factor – for a given number of beds in a care home, most of the
        margin is made at the last 10-15% of occupancy, as at the higher end, variable overheads do
        not increase proportionately. Industry analysts have reported that Four Seasons have not
        performed well in this key metric, and it may be a limiting factor going forward.

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Given the complex group structure and tax avoidance on the property portfolio, it is impossible to
say that the care home operation could be extracted as a profitable stand alone operation. For
example, the care home operations reserves of £88m are invested within the group rather than
externally. The care home operation is making a loss at the moment, but is also restructuring in
order to cut costs (exceptional administrative expenses of £1.2m in 2009, equivalent to 4.2% of
normal operating costs). Given the level of retained earnings (reserves) this would normally not be a
problem, but the position of the group makes it less positive.
The company undoubtedly has some major financial risks, but the delay of the debt restructuring
until 2012 and the fact that the Operating Company is still expanding and restructuring makes
financial collapse in the next twelve months seem a lesser risk. Within this time frame it is expected
that Four Seasons will inherit Southern Cross operations from its property investment activities.
However, in the short to medium term (14 months to 3 years) financial risks are very high due to the
need to restructure a complex and antagonistic debt portfolio, and implement a strategy that copes
with tight fees from the public sector and a demand for increased quality. ADASS may want to
actively plan for a worst case scenario within this time frame.

                                             Page 3 of 12
Four Seasons Health Care Structure and Operations
Four Seasons is part of a large and complex Group structure. The ‘Care Homes’ operation, managed
through the Four Seasons Health Care Group, delivers residential and nursing care, day care,
domiciliary care and specialised care services; the group also includes a number of capital holding
and property investment companies, under the Rhyme (Jersey) Group. The immediate parent
company is FSHC (Jersey) Holdings Ltd and the ultimate group parent is FSHC (Guernsey) Holdings
Ltd, a Guernsey-registered holding company.

                                                     FSHC (Guernsey)
                                                       Holdings Ltd

                                                       FSHC (Jersey)
                                                       Holdings Ltd

                          Four Seasons Health                      Rhyme (Jersey)
                              Care Group                              Group

            Four Seasons Health

Four Seasons was formed in the late 1980's and has expanded to its current size through both the
acquisition and construction of care facilities. The company has a track record of buying out smaller
chains of care homes and re-branding them as evidenced by the takeovers of Tamaris (formerly
Quality Care Homes) and Bettercare. It has recently acquired a further 12 homes and 3 specialist
units, and has reached an agreement to take ownership of the business operations of another
provider, Care Principles, after securing CQC regulatory approval.
Acquisitions therefore continue to be a major part of the company’s future plans and their aspiration
to become the leading independent provider of healthcare services in the UK.
Under the Four Seasons Health Care brand the group owns and operates over 440 Nursing and Care
Homes and specialised Care Centres in England, Scotland, Northern Ireland, Jersey and the Isle of
Man. FSHC homes provide:
       Personal care
       Nursing care
       Dementia care
       Intermediate care
       Short-term respite care
       End of life palliative care

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In addition there are a small number of specialist centres which offer dedicated care for alcohol
related brain damage and for people with short and long term diagnosed mental illnesses, learning
disabilities and physical disabilities.
FSHC also operates a Glasgow children’s nursery, a North Yorkshire based Domiciliary Care service, a
specialist day centre in South West London, retirement apartments in North Yorkshire and Jersey,
retirement villages in Scotland, Northern Ireland and the Isle of Man as well as private residential,
nursing, respite and dementia care facilities in North Yorkshire.
Under the Huntercombe brand the group provides specialised care for people with mental disorders,
learning disabilities, acquired brain injury or physical neuro disabilities and care for children and
adolescents with special mental health needs. Huntercombe operates from 30 hospitals and
specialised care centres throughout England and Scotland with around 700 beds (prior to recent
The Group operates a number of defined benefit pension schemes for its 21,000 UK and IOM
employees, with pension fund assets held and administered separately from those of the Group.

Financial Background and Issues
Beginnings and expansion
Four Seasons started out as a small healthcare operator working only in Scotland. They key to the
expansion of the operation was the appointment of Hamilton Anstead as Chief Executive, Under
Anstead, the business underwent an acquisition programme that saw Four Seasons become the
biggest care home operator in the UK, eventually overtaken by Southern Cross.
The business was an attractive proposition for many prospective purchasers, and was eventually sold
for £775m in 2004. Anstead retained a stake in the business but did not remain as CEO. He
eventually severed all ties with the business in 2007.
Anstead had a reputation for charismatic leadership and hard work, and many of the structures and
key people he put in place as the business developed were broken up by the new owners.

Repurchase by Three Delta - leveraged buyout
The 2004 purchase of Four Seasons saw Alliance Capital Partners pay £775m to Alchemy, the
venture capital specialist run by John Moulton. Alchemy had supplied the finance that had enabled
Hamilton Anstead’s aggressive acquisition programme.
In 2006, 2 years later, Alliance Capital Partners sold Four Seasons to finance group Three Delta for
£1.4bn, almost twice the value of the 2004 sale. It is important to note that these sales, much like
the sale of Southern Cross to Blackstone, represent the removal of ‘value’ from the system when the
seller in effect ‘cashes in’. At this point in time, Three Delta was acting on behalf of the State of
Qatar and its sovereign wealth fund.
Analysing the purchase, although the Qatari government had invested in the company, the
remainder was funded with debt, including a very high rate interest loan from Royal Bank of
Scotland (RBS). In a complex deal, the entire loan of £1.2bn was provided by Credit Suisse, with a
special purpose company, Titan Europe ‘securitising’ the loan (i.e. selling it on to investors in the
form of bonds, notes etc.). Additionally, outside of the Titan package there were 2 Pay in Kind (PIK)

                                             Page 5 of 12
notes of £165m and £60m – these are short term loans where instead of interest being paid, the
total amount of debt accrues quickly before being repaid.
The financing deal had a 2 year life span, and by the time it was due to be refinanced, the ‘credit
crunch’ had hit. Property values were falling, and wholesale credit markets had ground to a halt. At
the same time, Four Seasons care homes operations were not displaying the profit that had been
factored into the sale price, on average failing to achieve the last 10-15% occupancy that provides
the greatest margin. As a result, the business was in a position where it was breaching its banking
covenants. In April 2008, RBS started demanding that Three Delta pump hundreds of millions of
pounds back into the business, while hedge funds started buying Four Seasons debt at a discounted
rate, hoping to make a quick profit. To make matters worse, the hedge funds banded together with
some of the financial institutions with a stake in the company in order to be represented by
Houlihan Lokey - a company with a reputation for playing hardball in debt negotiations.

Debt for Equity – RBS take a major stake
The protracted restructuring of the company’s debt had got the point where Hatfield Philips, who
was advising lenders, had approached Deutsche Bank to conduct a fire sale of the business if an
agreement could not be reached. Because losses were being capitalised (i.e. funded by further
borrowing rather than revenue), by this time debt had risen to £1.55bn, more than the original
purchase price. At the last minute, RBS agreed a deal whereby Four Seasons £1.55bn debt was
reduced to £780m, in exchange for RBS taking 40% of the equity in the company. However, this was
once again a short tem deal, with major restructuring required in 2010.

2010 – delayed restructure
In 2010, Four Seasons was forced back into talks with bondholders of the remaining £600m Titan
debt in the company. Negotiations were complicated by the fact that a group of bondholders, largely
made up of the distressed debt hedge finds referred to above, were insisting on repayment, despite
offers of an increase in interest on the notes of up to 10 times the original rate.
In a deal that is seen as innovative, the restructuring was delayed to 2012 by a majority vote, with
Deutsche Bank promising to find buyers for the bonds held by dissenting investors, if they agreed to
vote for the deal.
This is where the company are at now, with £750m of debt, and increased interest rates in order
keep investors on board.

Financial Performance
Financial performance is measured in 4 domains: liquidity, solvency, efficiency and profitability.

Liquidity considers the company’s ability to meet its current liabilities from its current assets. In 2009
the Care home operation maintained liquid assets (excluding monies owed by group companies) of
just under £106m and had current liabilities (again excluding inter-group borrowing) of £73m. This is
a satisfactory position.

                                              Page 6 of 12
The Care Homes operation had shareholders funds in 2009 totalling £308.8m. This was supporting
company borrowings of just under £15m. However, this does not tell the whole picture. The Care
Homes business sits within a complex group structure and has contingent liabilities to and with other
group companies, most likely in the form of cross-guarantees. The immediate parent (FSCH (Jersey)
Holdings Ltd) has shareholders funds of just £766k and borrowings of £788m. It is this debt which is
the subject of ongoing renegotiations between Four Seasons and its bankers and the company
acknowledges that its long term viability is dependent on the restructuring of this debt.

There are no significant issues apparent from either debt collection or creditor payment indices.
Overheads have been 6.5% of turnover for 2 years, up from 5.1% in 2007. Whilst this is
deterioration, the level of overheads is not a cause for concern.

It is necessary to consider the impact of the Group structure on overall financial performance. The
extent of inter-Group transactions, liabilities and dependencies are significant and this has the
potential to distort the underlying operating performance. For example, the Companies Act allows
for profits in one part of a Group structure to be offset by losses elsewhere within the same Group
for the purposes of accounting for Corporation Tax, under the principle known as ‘Group Relief’. In
2009 the Care Homes operation benefitted from Group Relief to the tune of £15m and this had a
significant impact on the tax charge, generating a £5.3m contribution to profits. Similarly, the Care
Homes operation is a net funder of group companies (to the tune of £33.9m in 2009) and this
generates a significant net interest income (£2.9m). The Care Home business generated an operating
loss of £716k in 2009 (2008:£1.6m profit) but was able to grow its shareholders funds entirely as a
result of the interest and tax credits.
Even allowing for these non-trading profits, the overall return on capital is low and reducing, down
from 2.2% in 2007 to 0.9% in 2008 and just 0.3% in 2009. This is barely above the amount that would
be available from an ordinary bank savings account.
Low overall profitability in this case is attributable to the high and rising cost of care. The gross
margin on turnover is just 6% - insufficient to cover relatively modest overheads in 2009. The
continuing pressure on care home fees is likely to exacerbate the downward pressure on profits and
this has been acknowledged by the company as a strategic risk in its 2009 accounts.

Other Factors
FSHC has defined & published its service standards and ‘aims to involve and inform all our residents,
in all our homes, all of the time about the care and services we deliver’.
They claim to ‘listen to the comments of others including our regulators and those that receive our
services and act accordingly to continually improve the service we give’. They do this through
inspection, annual residents’ surveys and through their daily interaction with residents and their

                                            Page 7 of 12
FSHC operate a formal complaints system, encouraging local resolution but offering both line
management and regional management escalation. Service standards for complaints are in place.
The company’s accounts reference a £21.5 million investment in quality in 2009 and a commitment
to ongoing investment in 2010/11. They claim to be one of the highest quality rated providers in the
independent sector, with 84.5% of its facilities in England rated Good or Excellent in 2009 (against a
sector average of around 81%) and enjoy above sector average occupancy rates (87.6% for FSHC and
83.1% for Huntercombe).
The overall average figure could be skewed locally, i.e. there will be areas with a high percentage of
good/excellent rating, and areas with a lower percentage. Therefore perception of quality by locality
may well differ.
The occupancy levels are a key factor – for a given number of beds in a care home, most of the
margin is made at the last 10-15% of occupancy, as at the higher end, variable overheads do not
increase proportionately. Industry analysts have reported that Four Seasons have not performed
well in this key metric, and it may be a limiting factor going forward.

FSHC are ‘committed to providing every resident with individual personalised care’ and to the
philosophy of person centred care. Each resident has a personal care plan and is assigned a key
worker whose role is to ensure the appropriate level of care is provided. Care plans are regularly
reviewed to make sure needs continue to be met. Residents, and where appropriate their families,
are involved as far as is practical in the decisions regarding their care.
Whilst FSHC is predominantly a residential care home provider, it does offer a diverse range of
domiciliary and private services, although these are concentrated in a small number of locations
rather than being offered across their whole operation.

Market Shaping
The company recognises that commissioning policy continues to move towards home based care
services rather than residential care for lower dependency clients who would have typically been
admitted in to residential care settings. There is an acknowledgement that this is driven by user
needs and choice, with forecast demographic change causing an increase in the demand for both
residential and domiciliary care services and an increasing strain on the public purse.
FSHC has largely discounted the possibility of an increase in public sector fee rate increase,
forecasting in its 2009 accounts a below-inflation rise of 0.5% for 2010/11. The possibility that fee
increases do not keep pace with the cost of care is identified as one of two principal operational

Four Seasons can only be described as being high risk in the short to medium term. It has twice gone
to the brink in debt negotiations where a ‘fire sale’ of the business was being actively considered.
The RBS debt for equity deal seems to have provided some breathing space, but until there is long
term certainty over the ongoing debt structure, the company’s viability will remain uncertain until

                                             Page 8 of 12
The operation of care homes ,if divorced from the Rhyme Property group, seems to have a viable
operating model if short term changes can be made to restore profitability and cope with spending
cuts. There are some positives here:

     The company is restructuring and committing to increasing spending on quality
     Funding cuts have been recognised as a strategic risk by the company
     There is scope for increased margin if occupancy rates can be increased
     The take over of Care Principles, financed by Barclays Capital, shows that there is some
      confidence in the viability of the company
However, key ratios on return on capital and occupancy levels are less positive.
Very short term collapse of the company (12 months) seems unlikely given these factors, but short
to medium term difficulties (14 months plus) seems more likely given the debt levels and
refinancing deadlines combined with continuing public sector reductions.

This document has been issued by Impact Change Solutions Ltd. It has been prepared solely for
informational purposes. The contents are based upon or derived from information generally
believed to be reliable although no representation is made that it is accurate or complete and
Impact Change Solutions Ltd. accepts no liability with regard to the user’s reliance on it.

                                           Page 9 of 12
Appendix A – Four Seasons Health Care Homes Limited Financial Extracts

                                                         31/12/2007      31/12/2008   31/12/2009
                                                               £OOO            £OOO         £OOO
 Tangible Fixed Assets                                        87,898         95,607       99,895
 Intangible Fixed Assets – Goodwill                          168,060        158,077      148,095
 Investment Properties
 Total fixed assets                                          255,958        253,684      247,990
 Trade Debtors & prepayments - excl group companies           36,461         38,440       38,243
 Cash & Bank                                                  45,793         32,600       67,571
 Debtors under 1 year - group companies                       48,534         42,230       12,364
 Debtors over 1 year - group companies                        53,279         55,840       58,640
 Total Current Assets                                        184,067        169,110      176,818
 Total Assets                                                440,025        422,794      424,808
 Creditors & Accruals                                         49,092         54,104       51,243
 Sort-term borrowing                                          22,492         22,904       14,961
 Taxation owed                                                16,125         15,876        6,897
 Monies owed to group companies                               34,431          9,450       24,725
 Total Current Liabilities                                   122,140        102,334       97,826
 Net Current Assets                                           61,927         66,776       78,992
 Total Assets less Current Liabilities                       317,885        320,460      326,982
 Provisions for liabilities & charges                         17,975         17,865       18,147
 Net Assets                                                  299,910        302,595      308,835
 Called up share capital                                     220,032        220,032      220,032
 P&L Account                                                  79,878         82,563       88,803
 Shareholders Funds                                          299,910        302,595      308,835

 P&L Account Extract
 Turnover                                                    414,140        437,955      460,744
 Cost of Sales                                              -387,734       -409,486     -432,969
 Gross Profit                                                 26,406         28,469       27,775
 Admin Expenses - ordinary                                   -21,210        -28,418      -30,082
 Other operating income                                        1,580          1,585        1,591
 Operating profit                                              6,776          1,636         -716
 Admin expenses - exceptional                                 -4,297         -2,291       -1,249
 Profit /Loss on sale of assets                                  -64
 Net Profit before Interest & Tax                              2,415           -655       -1,965
 Interest payable                                             -6,084          -2783        -2177
 Interest payable - exceptional                                                -154         -443
 Interest Receivable                                          10,172           6283         5513
 Net interest                                                  4,088          3,346        2,893
 Profit Before Tax                                             6,503          2,691          928
 Tax on Profit / Loss                                          -2491           -104         4793
 Tax on Profit / Loss - exceptional                                             -64          519
 Total Tax on Profit/Loss                                      -2491           -168         5312
 Retained Profit / Loss                                        4,012          2,523        6,240

                                         Page 10 of 12
Appendix B – FSCH (Jersey Holdings) Limited Financial Extracts1

                                                                       31/12/07      31/12/08 31/12/2009
                                                                       £OOO            £OOO      £OOO
    Tangible Fixed Assets                                                                        747,872
    Intangible Fixed Assets - Goodwill                                                           -65,933
    Investment Properties                                                                        146,080
    Total fixed assets                                                          0           0    828,019
    Trade Debtors & prepayments - excl group companies                                            39,284
    Cash & Bank                                                                                   75,075
    Debtors under 1 year - group companies
    Debtors over 1 year - group companies
    Total Current Assets                                                        0           0     114,359
    Total Assets                                                                0           0     942,378
    Creditors & Accruals                                                                           79,753
    Sort-term borrowing                                                                           787,689
    Taxation owed                                                                                  21,307
    Monies owed to group companies                                                                 14,817
    Total Current Liabilities                                                   0           0     903,566
    Net Current Assets                                                          0           0    -789,207
    Total Assets less Current Liabilities                                       0           0      38,812
    Provisions for liabilities & charges                                                           38,046
    Net Assets                                                                  0           0         766
    Called up share capital
    P&L Account                                                                                      766
    Shareholders Funds                                                          0           0        766
    P&L Account Extract
    Turnover                                                                           462,251    486,034
    Cost of Sales                                                                     -353,626   -377,083
    Gross Profit                                                                       108,625    108,951
    Admin Expenses - ordinary                                                          -25,913    -25,087
    Other operating income
    Operating profit                                                                    82,712     83,864
    Admin expenses - exceptional                                                      -316,139    -20,786
    Profit /Loss on sale of assets                                                          72         25
    Net Profit before Interest & Tax                                                  -233,355     63,103
    Interest payable
    Interest payable - exceptional
    Interest Receivable
    Net interest
    Profit Before Tax
    Tax on Profit / Loss
    Tax on Profit / Loss - exceptional
    Total Tax on Profit/Loss
    Retained Profit / Loss
    Limited figures available, as incorporated as a new company to reflect RBS ownership

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Appendix C – Restructured Group Profit and Loss post debt restructuring (75 days)

 P&L Account Extract                                                £000
 Turnover                                                         25,767
 Cost of Sales                                                   -20,528
 Gross Profit                                                      5,239
 Admin Expenses - ordinary                                        -1,483
 Other operating income
 Operating profit                                                  3,756
 Admin expenses - exceptional                                          0
 Profit /Loss on sale of assets                                        0
 Net Profit before Interest & Tax                                  3,756
 Interest payable                                                  -2259
 Interest payable - exceptional
 Interest Receivable                                                   6
 Net interest                                                      -2253
 Profit Before Tax                                                 1,503
 Tax on Profit / Loss                                               -737
 Tax on Profit / Loss - exceptional
 Total Tax on Profit/Loss                                           -737
 Retained Profit / Loss                                              766
The first accounts of the restructure group post RBS debt for equity deal seem to show a return to
profitability via reduced interest, but the impact of increased interest by means of the 2010 deal to
delay restructure is not known at this point. The figures are too limited and it is too early in the day
to say that this represents a sustainable position.

Appendix D – Key Financial Ratios for Four Seasons Health Care Homes Ltd.
                                                                   31/12/2007   31/12/2008   31/12/2009
 Current Ratio                     Current assets/current
                                                                      1.51         1.65         1.81
 Adjusted Current Ratio            Current assets /current
                                   liabilities (net of group          0.94         0.76         1.45
 Defensive interval                Current assets (less
                                   stock)/daily operating costs
 Gearing                           Total Borrowing / Equity (or
                                   funds) + long term                 0.07         0.08         0.05
 Average collection period         Average sales / average
                                                                     11.36        11.08        11.75
 Average payment period            Average cost of sales /
                                                                     -7.90        -7.73        -8.00
                                   average creditors
 Overheads as % of turnover        (Overheads / Turnover) x
                                                                      -5.1         -6.5         -6.5
 FACE % (Charities only)           (Fundraising + Admin Costs /
                                   Total Expenditure) x 100
 Return on Capital Employed        Net PBT / shareholder funds
                                                                      2.17         0.89         0.30
 (for profit only)                 x100
 Net Profit Ratio (for profit      Net PBT / net sales x100
                                                                      1.57         0.61         0.20
 Gross Profit Margin (for profit   (Gross profit / total income)
                                                                      6.2          6.4          5.9
 only)                             x 100

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