• Ray Miles of Southern Cross steps down ahead of financial restructuring
• Cash-strapped nursing homes operator turns to government for support
Southern Cross Healthcare, the country's biggest nursing homes operator, has sought the help of the prime minister as part of its struggle to stay afloat amid the worst financial crisis in its history.
The company, which is fighting a rearguard action to stave off insolvency, has asked Downing Street to tell local authorities not to blacklist its homes while it struggles to come up with a rescue plan.
Jamie Buchan, chief executive, has urged that the business be treated normally, despite fears in the City that the company could crash into administration unless it reduces its enormous £240m-plus annual rental bill on 750 properties.
Industry executives say that financial turmoil at Southern Cross has dissuaded some local authorities from placing elderly or sick people in its homes. But a source close to the company denied this and insisted that the government was being supportive at "a difficult time".
The department of health has also been asked to lobby local authorities on Southern Cross's behalf.
On Tuesday, Southern Cross's chairman of the past three years, Ray Miles, quit as the company embarked on a crucial round of talks with landlords.
"While there can be no certainty as to the success of these negotiations, the prevailing mood appears constructive," the company said.
He is being replaced by Christopher Fisher, a non-executive director and a former Lazard banker with experience of corporate restructuring. As part of the latest management shake up – there have been half a dozen in the past two years – Buchan will hand over day-to-day operational management to Mark Cash, a Southern Cross regional director.
The company's problems stem from heady expansion when it was owned by the US private equity group Blackstone, which undertook the sale and leaseback of homes to bankroll a number of expensive acquisitions. Many leaseback agreements included upward-only rent reviews of up to 2.6% annually.
The upshot is that Southern Cross is lumbered with a huge rental bill at a time when local authorities are placing fewer people in homes to save money in the wake of public spending cuts. Fees paid by councils to operators are being reduced in real terms. In the past 18 months, occupancy rates at its homes have fallen from 92% to 84%, with analysts saying that only some of the decline can be attributed to local authority cutbacks.
Paul Saper, chief executive of LCS International, the healthcare consultants, said that the cash-strapped group had not "invested properly in some of its homes, with doors falling off the hinges at some properties". He added that, a year ago, about 40 of the company's homes faced embargos from the regulator and that several had been the target of enforcement orders linked to issues such as hygiene and standards of safety.
Southern Cross warned last month that it might breach banking covenants and that its rent bill was "unsustainable". The shares have fallen by 98% since early 2008. Its market value is less than £12m; before the recession it was worth £1.1bn.
Commenting on his decision to step down, Miles said: "Given that my own experience has been mainly building businesses and improving their operational performance, and that the company now faces a period of intense financial restructuring, it is time to hand over to others with more experience of this."
Southern Cross has drafted in accountants KPMG to advise on talks with its landlords and lenders, Barclays and Lloyds Banking Group, which are owed £25m. The covenants that could be breached are based on the company's costs as a percentage of earnings before interest and tax.
In a further blow six weeks ago, the company revealed that takeover talks begun in 2010 had come to nothing, while trading had deteriorated. The board received several bid approaches, but none was "likely to result in a meaningful offer being made".
The GMB union said that there was a risk that vulnerable people could be made homeless, but in the event of insolvency, Southern Cross's 31,000 homes would be run by local authorities or landlords on behalf of an administrator. Sources said that whatever happened, "no one would end up on the streets".