Bridging loans for care homes: supporting SMEs when they need it the most

Here at Fiduciam, we lend on care home assets when the underlying business model is strong, where experienced management is in place, but often due to special situations high street banks have vacated the playing field. Often these SMEs find it difficult to finance their expansion or are abandoned in times of short-term operational or financial difficulties, even though the issues faced by the business are generally resolvable in the medium-term. Fiduciam will take the time to analyse the business plan to determine how an expansion can best be financed.  Equally Fiduciam will take the time to understand any underlying issues and endeavour to provide the business the short-term liquidity required to bridge their way back to sustained growth.  Put simply, through our short-term finance, experienced entrepreneurs are able to grow and protect the equity which they often have built up over many years.

For example, Fiduciam was approached to refinance a loan a family-owned care home group had with a high street lender which was seeking to foreclose the loan despite the business still being in profit. A 24-month bridging loan from Fiduciam allowed the care home group to rectify their issues with the Care Quality Commission (CQC), improve their profitability and then, in fact, re-finance with a bank at lower interest rate after only c. 12 months. If the previous high street lender had proceeded to sale by administrators, the principals would have lost c. £8m in equity built up over twenty years of trading. Furthermore, by keeping the care homes operating, numerous jobs were saved and much-needed patient beds maintained. 

Fiduciam also looks to lend to care homes in other situations where high street banks have limited appetite. Our team will work with borrowers who are expanding an existing care home or seeking to establish or acquire a business.  Individuals experienced at operating care homes can approach us to fund their new projects, even if the borrowing entity does not have an established trading record.  Fiduciam would also lend against a care home asset when the borrower is not the operator but has a formal lease in place with an experienced care home operator.  Our care home finance is available to borrowers throughout the UK, including Scotland, and throughout Ireland.

From an underwriting perspective, there are several unique risk factors we consider when conducting our credit due diligence on a specialist care home asset:

Experience of UBO / Care Home Manager

One of the key elements we look at is experience of the underlying principal(s) of the transaction in the highly specialised care home sector. If the principal does not manage day-to-day operations, we also carry out due diligence on the care home manager to ensure he or she has the relevant experience to run a care home successfully.

We have seen many examples in which a care home business runs into financial difficulty because of operational mismanagement of the care home, which in turn leads to problems with the regulator – the Care Quality Commission (CQC).

Care Quality Commission (CQC)

CQC regulates all health and social care services in England, which also includes care homes.  A common breach in covenants for a care home business with their high street banks is the downgrading of their CQC rating, which range from “outstanding” to “inadequate”. If, after a site inspection by CQC, the care home gets downgraded to “inadequate” then potentially they will not be able to enrol new patients to the care home. Naturally this will have a material and adverse impact on their cash flow / profitability. 

Fiduciam is happy to support care home businesses where they run into short-term difficulties with CQC but have a plausible and detailed strategy / plan to improve their CQC rating; we will take the time to understand the proposed strategy and work closely with all parties to ensure this is achieved during the term of the loan.  

Vacant Possession Value vs Open Market Value

Fiduciam will lend against the trading or Open Market Value (OMV) of a care home asset, but given we are a short-term asset lender, we still need to ensure we are comfortable with the vacant possession (VP) value and not just the OMV value of the care home asset. 

Given the above, Fiduciam generally prefers lending to care home assets where they are located in good areas where this is a proven demand for properties.

Cash flow – Capital Expenditure (CAPEX)

Given the specialist nature of care homes, they will tend to have a significant annual capital expenditure  (CAPEX) requirement which needs to be factored into the overall cash commitments (compared to say a standard residential property); Fiduciam will always carry out due diligence on what the CAPEX requirements are for a care home business to ensure it is realistic and sufficient to ensure it continues to be compliant with the CQC.

As a broader point, Fiduciam will also carry out in-dept due diligence on the cash flow of the care home to ensure it is sufficient to service the debt over the term of the loan. 

Supply side risk of quality staff

The potential impact of labour market shortages on staff supply (and consequential use of agency staff) in the care home sector is a risk factor that Fiduciam will always assess by evaluating whether the borrower is recruiting and retaining staff of the right quality, and also to understand how they incentivise their staff to stay.   

Given the highly regulated nature of care homes, we would also check whether there are formal training plans in place for all staff.

Generally speaking, if there is a heavy reliance on agency staff and we note that this is a high percentage of the overall staff payroll expense, then we would consider this as a material adverse warning sign.   Use of agency staff tends to add significant extra cost to a P&L, and by itself has been known to make a care home financially unviable.

Concluding notes

Our bridging loans are in strong demand in the care home sector and generally serve to finance acquisitions, refurbishments, expansion plans and corporate turnarounds.  Our specialized underwriting team has built up extensive experience in this area.  All our care home loans have performed well, which is also thanks to Fiduciam’s practice of developing a productive relationship with the care home operators during the term of the loan. 

Where banks cause despair, Fiduciam’s Santas bring hope

As many entrepreneurs and SMEs discover to their despair, it has become difficult to count on the traditional banks when they need a loan for a new project or to expand their business.  Traditional banks across Europe continue to reduce their commercial loan books as a result of the Basel III rules.  A check-the-box culture, a sharp reduction in number of relationship managers and lengthy and unwieldly loan application processes make it increasingly difficult for many entrepreneurs and SMEs to rely on traditional bank finance.  This void is being filled by a number of alternative lenders, such as Fiduciam.  2019 has been a good year for Fiduciam. We continued our rapid expansion by hiring 25 additional staff members. Our loan book surpassed €260 million in size and monthly production has been increasing rapidly through the year. October was a record month with over €51.7 million of new loans provided to entrepreneurs and their enterprises. In 2019 we also successfully expanded into Germany by opening an office in Frankfurt and we closed our first Scottish loan.  We are looking forward to an even more successful 2020 and wish all our clients a happy and prosperous new year.

More culture, fewer rules

The world of finance and corporate culture are not always the best partners, as I have been able to witness extensively during my city career.  There is the culture of greed, but greed is a biological imperative and not really culture.  During my days at Merrill Lynch the board wanted to define a clear culture and launched the “five principles”, I still remember them by heart:  client focus, respect for the individual, teamwork, responsible citizenship and integrity.  But as the synthetic CDO debacle demonstrated during the financial crisis, these principles did not mean a lot to a number of Merrill Lynch employees and managers.  Had they done, Merrill Lynch would still be around as a successful independent firm.

For a corporate culture to be successful, it cannot just be a declaration, it needs to be embraced by all employees and be part of the DNA of a company.  It pulls employees together behind a mission, brings meaning to their work, gives them a sense of belonging, allows them to take pride in their jobs and motivates them.  This in turn leads to better performance and more satisfied clients, as research has shown over and over. 

In the financial services industry, the importance of corporate culture goes well beyond this, as it keeps a check on the biological imperative we are all born with: greed.  Financial services and greed are like fuel and fire.  Therefore, corporate culture has a very important role to play here, to channel this biological imperative into something constructive and sustainable. 

In this respect too much focus tends to be on rules and policies.  These can easily be circumvented and rarely deal with all situations in our complex world.  I am of the strong belief that for risk management to be successful, corporate culture is much more important than rules.  Yet it beggars belief that most of the focus of regulators and bank managers still tends to be on the latter, whilst largely neglecting the former.  The financial crisis did not happen because of a lack of regulation, it happened because too much reliance was placed on regulation and nobody cared about the corporate culture of financial institutions. 

It is the role of management to install a corporate culture, it does not grow simply by itself.  Therefore it is crucial for each manager to live the corporate culture day in, day out.  Just proclaiming a few principles does not make a lot of difference, as the Merrill Lynch example shows. 

The corporate culture I try to embody every day at Fiduciam is one of diligence, integrity, hard work and fairness, in an environment that is diverse, young, pleasant and ambitious.  No policy can ever replicate the benefits such culture brings and, most importantly, such strong culture is the necessary foundation for our rapid growth as a successful marketplace lender.

Resolution to the housing crisis in Ireland

There has been much focus on the UK property market and whether house prices are rising or falling and whether this may or may not be due to Brexit.  What we hear less about is what is happening with property prices with our closest neighbour The Republic of Ireland.

Ireland is most often quoted these days purely in relation to the potential backstop. What few papers report on is the current housing crisis in Ireland.  Just a few years ago Ireland had one of the world’s highest rates of home ownership, but this ownership has dropped and both property prices and rents have risen dramatically. In fact, in May of this year, research by Deutsche Bank declared Dublin in the ‘Top 10 most expensive places to rent in the world’.

The shortage of affordable homes is a huge issue, with Ireland’s Department of Housing, Planning and Local Government in August announcing €84m in funding for 25 local authorities providing 1,770 affordable homes nationally. As a long-term solution, this is fine, but how does Ireland deal with this issue in the short term?

It is estimated that 685,000 houses were built in Ireland in Celtic Tiger years, between 1997 and 2007. Where have all these houses gone? Figures by the Department of Finance back in March of this year revealed that €24 billion of loans, including many substantial buy-to-let portfolios have been sold to funds at an average discount of 52%. Many of the sales were completed without the consent of mortgagees. Most of these were non-performing loans and the purchasing fund often wastes no time in foreclosing on the loans. This cycle still continues with Ulster Bank announcing the sale of 4,000 loans worth €900million as recent as July of this year.

How can short term lenders relieve this pressure? The answer is simple, they fill the gap where mainstream lending is simply not available. For example, Fiduciam has provided numerous loans which have allowed borrowers to buy their old portfolios back from the funders. The borrowers can negotiate with the funders directly, safe in the knowledge that they have a reliable funder supporting them through the process. The properties are then brought back on the market and rented out or sold.

Loans such as these have also enabled borrowers to complete outstanding development works on “ghost estates” that have been sitting dormant since the collapse of the housing market. This brings more properties into the market which, in turn, eases the property supply issues. Borrowers can then refinance with a mainstream lender when their properties have been modernised and rents have been normalised.

Ireland’s businesses are also crying out for lenders to help them get out of a position where they might lose everything by restructuring their loans. This affords borrowers an opportunity to re-establish their business with a viable exit via mainstream finance, or the sale of the assets on the open market.  Such short to medium term loans provide the perfect ‘pit-stop’ for borrowers.  In essence, providing ‘mid-stream’ lending prior to the subsequent exit with a mainstream lender.

Loans for such purposes are relatively new in the Republic of Ireland, but they can be a positive life saver for borrowers whose loan has been sold and who are consequently at risk of repossession.

Fiduciam’s training programme sets benchmark in the bridging loan industry

The opportunities within our industry are myriad, the trick is to attract the right people and then to make sure they are nurtured and given the chance to achieve their own goals, whilst also achieving your company goals.

Henry Ford, Founder of the Ford Motor Company, said “The only thing worse than training your employees and having them leave is not training them and having them stay”.

At Fiduciam we want our employees to stay for all the right reasons.

When recruiting, whether it’s a graduate, an intern, or someone with years of experience, the most important thing is to ensure the people you employ have the right attitude and fit your business. 

With the right attitude you have the foundations for someone to build a career, rather than just turn up for work.

For career progression to be valid you need to provide explicit support to allow your staff to thrive and develop.   You can then uncover potential and assist your employees to progress to more senior roles.

Structured training is therefore vital.  Here at Fiduciam, for instance, we have a training and development programme that is designed with career progression as the ultimate goal. However, there are other benefits including increased motivation and engagement and most importantly a reduction in staff turnover. Giving employees the tools to upskill throughout their careers also means you can reduce supervisory needs and enhance satisfaction and confidence.

The way we run our training programme is on a module basis using the talents of existing employees in every department to carry out the actual training. This not only showcases the experience of existing team members it gives them an extra sense of worth as they pass on their knowledge to new team members and help them rise through the ranks. Our multi-faceted training programme consists of 28 modules, such as cashflow analysis, real estate valuation, legal documentation, credit analysis, etc. Career progression is supported by the successful completion of relevant modules. There has been over 110 hours of training provided for Fiduciam employees over the last 9 months since the inception of the training programme.

The key thing with recruiting is that when you get the right person you never let them forget that you believed in them enough to hire them, and that you continue to believe in them throughout their career.

Clint White, director, adds “The recent EY UK Bridging Market Study has highlighted ‘access to talent’ as one of the two most important challenges for bridging lenders.  We place a huge emphasis on our training programme to not only attract new talent but, equally importantly, to cultivate and retain that talent.  By doing this we enhance our company reputation and profile as an employer invested in its staff.”