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The Long Term Care Sector… The Long Term Care Sector… Presentation Transcript

  • The Long Term Care Sector… Knowing your business, meeting your needs Andrew Mattick Healthcare Manager, Commercial Banking South East Region
  • Agenda
    • Market Overview - changing direction?
    • What does a Bank look for in a Care Home deal?
    • What does a Bank look for in a Dom Care deal?
    • What are the key Business Risks?
    • Debt Structuring - different approaches for different types of deals
    • Case Studies
    • Summary
  • Market Overview Persons receiving care - UK 2005
  • Care Market Overview
    • Areas of contraction: Smaller residential homes - is the writing on the wall? Future ‘volume’ delivery of residential care via Domiciliary Care?
    • Growth areas: larger purpose built Care Homes / Nursing, Specialist Care and Domiciliary Care. Consolidation still continues, with a smaller number of ‘regional’ operators emerging.
    • The dominant business model: Dom Care / Extra-Care or Care Homes?
    • No easy answer:Dome Care / Extra-Care are the favoured ‘social’ decisions, but reality tells us that the future burgeoning demography of affluent elderlies will still embrace a core percentage of ‘illness’: meaning Care Homes will have to feature - the ‘medical’ decision.
  • Dom Care Market Overview Consolidation is gathering pace across the Dom Care Sector: Majors Regional Operators Owner Managed Operators
    • Buy + Build strategies are more evident
    • Gaining critical mass within a geographic area to ‘look attractive’
    • Small acquisitions funded through cashflow historically
    • Banks now seeing more scalable transactions that need formal debt
    • LA Tendering process is also a factor - impact on local staff pool
    > 10,000 hours per week 5 to 10,000 hpw c1,100hpw
  • What does a bank look for in a Care Home deal?
    • Management
    • Experience
    • Management Team / Staff
    • Inspection Reports
    • Regulatory Reform (Fire Safety) Order 2005
      • New Fire Safety Order wef 1 Oct 06 :-
      • Fire Certs no longer issued
      • Written fire risk assessment required
      • remove and reduce identified risks
      • Fire and Rescue Service to check compliance
      • keep assessment under review and train/inform staff
    • Asset quality
    • New / Conversion
    • National Minimum Standards
  • What does a bank look for in a Care Home deal?
    • Serviceability
    • Break-Even Occupancy Levels & ‘Margin of comfort’
    • Agency costs
    • Security
    • Business value
    • Bricks & mortar
    • Control of Asbestos Regulations 2006
    • Duty to manage asbestos in non-domestic premises - Type 2 survey
  • What does a bank look for in a Dom Care deal?
    • Management
    • Experience
    • Management Team / Staff
    • Inspection Reports
    • Asset quality
    • New / Conversion
    • National Minimum Standards
  • What does a bank look for in a Dom Care deal?
    • Management
    • Experience
    • Management Team / Staff
    • Inspection Reports
    • Asset quality
    • New / Conversion
    • National Minimum Standards
    • Serviceability
    • underlying cashflow generation / adjusted EBITDA
    • Security
    • Business value
    • ???? Formal LA Contracts are effectively our security.
    • Above all else, cashflow analysis is absolutely key.
    • Strategic objectives: buy + build strategy etc
  • Managing Risk – Why Bother?
  • Events that are outside of your control - “Acts of God…”
  • Consideration of Business Risks
    • Anything that could (or does) affect your business:
    • Fees - what increase are you receiving from the Local Authorities?
    • Costs – particularly Staff
    • Supply - Occupancy levels/ single / double rooms
    • Demand – type of service offered
    • Events that are outside of your control:
        • Economic volatility — UK or elsewhere
          • Interest Rates
    What are the Business Risks?
  •  
  • Consideration of Business Risks
    • Anything that could (or does) affect your business:
      • Fees - what increase are you receiving from the Local Authorities?
      • Costs – particularly Staff
      • Supply - Occupancy levels/ single / double rooms
      • Demand – type of service offered
      • Events that are outside of your control:
        • Economic volatility
    What are the Business Risks?
    • Interest Rates - a 1% increase in Base Rate on £2m of borrowing means an extra £20,000 in interest costs straight off the bottom line
    • Regulation - AQAA, Review of NMS
    • Government legislation - e.g. National Minimum Wage, Minimum Holiday entitlement increasing from 20 days to 28 days over the next 18 months
  • Debt Structuring
    • Different types of funding:
    • Rebank scenarios / releveraging the Balance Sheet.
    • Acquisition Finance (purchase of business or target home).
    • Development Finance (extensions / new builds or Extra-Care Units).
    • Duration of Loans:
    • Care Homes: 20 years now commonplace / Asset quality / CRH
    • Dom Care: Much shorter - Corporate Finance approach, 3-5 Yrs
    • Other Factors:
    • Interest Rate Protection
    • Keyman Insurance
    • Key points differentiating Care Home v Dom Care ‘Acqn Finance’:
    Debt structuring
    • Cashflow modelling is key in both analyses.
    • Keyman Cover.
    • Interest Rate protection.
    Debt : EBITDA and Cashflow covenants LTV and Occupancy covenants Key ratios: Valuer/Accountant Valuer Financial Due Diligence: 3-5 years 20 years Loan Term: No Yes Freehold: Dom Care Care Home
  • Case Study - Acquisition Finance
    • Established operator - 3 LD Homes / 1Nursing Home.
    • Strategy: acquired 2 homes over the last 18 months, looking to expand gradually in coming years
    • Opportunity to purchase a 5th Care Home - purchase price £1.5m - variable occupancy levels in last 12 months
    • 100% funding sought, but overall LTV 75% - 20 year term
    • Margin of Comfort - 13% assuming interest rate protected
    • Management capability - mixed - Inspection Reports
    • Valuers Commercial Appraisal - Sustainable Future Trade
    • Management Consultants - Review of Management Team
    • Bank obtained satisfaction / comfort from external advisors enabling the deal to be completed re next project…..
  • Case Study - Development Finance
    • Relatively new entrant into the Care Sector.
    • Purpose built 30 beds, with immediate 24 bed extension after purchase
    • Ingoing Valuer Due Diligence determines lending levels at outset
      • Going Concern Valuation as an existing 30 bed unit
      • Value on completion of the development work (turnkey value)
      • Forecast Going Concern Valuation once 54 beds fully operational
    • 3 Phases of lending (1) Purchase, (2) Dev Funding, and (3) Final Leverage
    • RBS lends 100% of Development costs with Turnkey Value at 70%
    • Once Fully Operational, RBS then able to lend further against new Going Concern Value to go towards next project…..
  • Prepare Build period Fill-up period Fully operational (final leverage) Interest Only / Roll up C&I Repayments v1 v2 v3 Case Study - Development Funding Source: RBS
  • Summary
    • RBS is a leading provider of finance to the Care Sector, and remains supportive of the sector as a whole.
    • We have a long term approach, creating innovative debt solutions that follow the evolution of the sector as a whole.
    • Management expertise and asset quality are fundamental, but underlying cashflow generation is the most important aspect from a banking perspective.
    • Creative and flexible funding is our aim - structuring a deal in a fashion that is acceptable to client and Bank in achieving the strategic aims of the deal.
  • Summary
    • Know your business
    • Assess your risks
    • Identify the risks you can control
    • Devise risk management strategy
    • With the help of your Bank implement your strategy and take control
    • Get on with what you do best…
    … . RUNNING YOUR BUSINESS!!!
  • Contact Andrew Mattick Healthcare Manager South East Region The Royal Bank of Scotland / Nat West Bank Mobile: 07768 701225 Email: [email_address] www.rbs.co.uk