Care Homes in Distress

Introduction

The Insolvency Service statistics for January 2025 show that (after seasonal adjustment) the number of registered company insolvencies in England and Wales was 6% higher than in December 2024 and 11% higher than in January 2024. Interestingly, the number of company insolvencies registered in Scotland in January 2025 were 15% lower than in January 2024. While these statistics paint a mixed picture across the UK, there is a view that corporate distress in the UK, and more widely in Europe, is rising as businesses face persistent economic challenges with increasing costs on the horizon.  

The adult care sector is one sector which is particularly vulnerable to these market forces. It continues to be burdened by high input costs, pressures on social care budgets and staff shortages. When coupled with growing costs of regulatory compliance, it is a challenging landscape to navigate. Although interest rates have started a slow descent from their 5.25% high, care homes (like many other businesses) have had to shoulder the increased cost of servicing debt for a sustained period. The result is that many care homes are operating with depleted cash reserves and on thin margins – without corrective action, the risk of sleep-walking into zombie territory is high.

Helpfully, Care England in partnership with Cornerstone Care Solutions, have published a series of reports to explore the underlying causes of care home failures and to outline turnaround strategies. The first of those reports was published in January 2025 and focuses on the need for timely intervention to ensure profitability and compliance (Care England Report).

 

Common Themes

At DLA Piper, the Restructuring team has been involved in a number of distressed care home mandates. We have identified below some common themes:

 

Distress and early action

Key indicators of distress, as spotlighted by the Care England Report include:

1. declining occupancy rates
   • income declines while overhead costs remain the same;
2. repeated poor regulatory reports from the CQC (England and Wales) or Care Inspectorate (Scotland)
   • regulatory reports highlight shortcomings and deficiencies in the level of care/facilities provided. Is there insufficient cash to cover repair/maintenance/staff training?  Promptly addressing “areas for improvement” as identified by the regulator can be less costly than leaving to a later date. Failure to take remedial steps will inevitably lead to a downward spiral and bigger issues including, but certainly not limited to, reduced occupancy rates (see 1 above), reputational harm and, potentially, formal notices being issued; and
3. financial statements flagging concerns i.e. covenant breaches and marginal headroom in cashflow forecasts
   • early intervention and clear communications with lenders/investors is always the best approach – it safeguards residents’ well-being, often avoids more costly measures, maintains stakeholder confidence and paves the way for a consensual path forward.

 

Workouts

In this sector, the stigma of insolvency can be damaging for stakeholders, particularly the residents and their families.  However, the restructuring plan (which keeps corporate structures, management and regulatory approvals in place) may be an attractive turnaround solution.

In 2023, Lifeways was the first successful use of the restructuring plan by a UK healthcare regulated business. Lifeways had approximately GBP190 million of secured debt, 10,000 employees and 4,200 residents/users in the UK. In summary, the turnaround involved (i) restructuring plans of seven group companies, (ii) a debt for equity swap where the senior lender wrote off GBP100 million of secured debt, took ownership of the group and injected GBP15 million of new super senior money, and (iii) a compromise of unsecured debts (including rent due in respect of Scottish and English leases).  

Could we see the restructuring plan deployed more frequently by care homes? It would certainly seem so given the ability to reduce rents, right size debt and achieve operational turnaround without impacting continuity of care. However, there remains much debate in the market about the feasibility of restructuring plans in the lower to mid-market space where many of the independent care homes operate. 

 

Our final thoughts

Financial distress in the care home industry requires added considerations given the vulnerability of residents and regulatory requirements. However, common with all sectors is the importance of early intervention and reaching out to experienced advisors to work through the potential options available.