The number of care home businesses going bust fell by 24 per cent in 2013, as many businesses finally reached the end of long-term loans taken on at high interest rates prior to the financial crisis, says Wilkins Kennedy, the top-25 accountancy firm.
According to Wilkins Kennedy, 51 care home businesses became insolvent last year, down from 67 in 2012 and 60 in 2011.
However, Wilkins Kennedy warns that the number of insolvencies last year was still far higher than in 2010 when 35 care homes went bust, and almost double the 28 care homes that went under in 2008, prior to the financial crisis.
The accountancy firm says local authority cuts have left many care homes unable to service debts or maintain high standards of care, forcing some into administration. However, overall insolvencies have fallen as many of the weakest care homes have now closed, leaving the more financially stable and successful businesses.
Stephen Grant, partner at Wilkins Kennedy said: “The care home sector has been turned upside down in recent years with local authority cutbacks forcing many businesses into administration. Many of the care homes that struggled through the financial crisis have now disappeared, with the overall financial health of the sector slowly improving as a result.
“However, even though the initial impact of local authority cuts now seem to have been absorbed, some care home businesses might need to brace themselves for further pain in this area as local authorities face another squeeze in their spending power for 2014-15.”
Many care homes borrowed heavily to fund growth in the lead up to the financial crisis as the care home sector expanded, locking themselves into long-term high interest loans.
Many also used interest rate swaps to protect against future rate rises, but that left them unable to benefit from the fall in interest rates when the financial crisis hit six years ago. An increasing number of those swap contracts have now come to an end.
Wilkins Kennedy says five year fixed rate commercial mortgages will also have reached the end of their term, which means that more care homes have been able to switch to lower rates and benefit from paying less interest on their debt.