Fitch Ratings published an update on U.K. care home deals last week after a two-year lull, reporting that both operating conditions and the performance of these securitizations have improved. Over the last two years this industry has undergone a number of changes benefiting care homes for seniors and physically disabled people across the U.K.
Performance in the U.K. care home securitizations has improved since 2003 as the sector emerged from a period of stress, noted Fitch analysts. There have been a number of owner and operator changes in the sector, with many securitizations having increased operator concentrations. After years of consolidation, only a small amount of diversity is left in the sector, but Fitch analysts said that current operators are stronger and more likely to withstand another period of stress in the industry.
Current ratings are seen remaining stable in the medium term for all transactions that are not currently on Rating Watch Negative. Fitch downgraded the B class notes of Craegmoor Funding No.2 on Aug. 17 to BBB-'from BBB' and they remain on watch but Fitch also upgraded nine tranches of six sale and leaseback care home securitizations in early September. For all transactions not currently on negative watch, Fitch expects ratings to remain stable.
The industry is benefiting from the continued growth of the 85 and over population, which is forecasted to triple by 2035. But costs are still a problem, according to healthcare analyst William Laing of Laing & Buisson, who last week spoke at a Fitch presentation of the care home sector. Although a number of corporates have a pipeline of new developments, independent care homes have yet to grow. As long as capacity loss continues to be as high as new developments, the industry will suffer from losses resulting from further closures. Laing said that capacity losses peaked in early 2000 but continued riding at high levels ever since.
"Fewer people are receiving formal care services than five to 10 years ago," said Laing. "Costs have been squeezed so much that we are likely to see a bounce back, as a result." There has been a reduction of care home beds from its peak in 1996, helping to bolster occupancy in the remaining homes. Laing expects that capacity will begin to level out and may begin rising again along with care home demand. He added that the local authorities running regional care homes better understand the damage done by squeezing prices in the past, but that they are still limited by how much the government will allocate for spending going forward.
Fitch also noted that the local authority fees have increased by 4% to 6% in real terms since 2001, which combined with increased occupancy levels, has provided improved revenues for the care homes. This has been offset partly by above-inflation increases in the national minimum wage, as well as adding to the operators' costs as up to 30% of care home staff earn something near the national minimum wage. Fitch believes that the trend in local authority fee increases is set to slow as budget allocations are forecast to reduce while the national minimum wage is forecast to jump 5.9% next year. While the government is looking into system improvements, it proposes to make changes with existing resources. "My view is that the government will have to come to a different conclusion on this matter," added Laing.
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