HPC and RBS - Head to Head

With the troubles facing the banking sector still very much at the forefront of the news, healthcare property consultant Ian Wilkie goes head-to-head with Mike Coster of RBS to ask the questions operators want answered......

With the troubles facing the banking sector still very much at the forefront of the news, healthcare property consultant Ian Wilkie goes head-to-head with Mike Coster of RBS to ask the questions operators want answered.

IW - Let’s cut to the chase straight away; the perception most people have, partly fuelled by the media, is that in spite of government initiatives to date, banks are simply not lending at present. What is the reality?

MC - The reality is we remain open to funding sound business proposals for clients, that make a difference to their business. Most of these are funding growth opportunities and we are supporting a full range of customers. If you look at commercial banking within RBS during 2008 across the UK, healthcare was the top-performing sector in each of our geographic regions. Many of our customers still have a desire to positively build their businesses and we want to help them.

IW - So is there any sense that the long term care sector is “safer bet” than some others in this climate? It is often referred to as something of a safe-haven because demand isn’t driven by factors such as disposable income. What’s the bank’s perspective?

MC - I think it is self apparent that it is a strong sector. RBS has been and remains a strong supporter and we are in it for the long term. Within any testing market comes opportunities, and we can see areas of potential growth, particularly in areas such as domiciliary care and development funding for new care homes.

IW - OK, so if banks are lending and like the sector, the issue seems to be that cuts in the Bank of England base rate are not being passed on to borrowers and lending rates remain linked to LIBOR.

MC - There are two questions here. Firstly on the base rate question, the majority of our business customers borrow on base rate linked terms (ie a margin above bank base rate) so they benefit on cuts in the Bank of England base rate as we pass on these changes immediately.

With regards LIBOR linked lending, new lending proposals of scale are far more likely to be LIBOR linked however there are many factors involved in commercial lending, and no two cases are ever the same, making it always difficult to provide an answer which would cover an entire industry or part of the market.

There are many factors involved in commercial lending, and no two cases are ever the same, making it always difficult to provide an answer which would cover an entire industry or part of the market.

IW - Fair point, but there are those existing operators who have established loans, who do see opportunities in the sector and want to expand their businesses but have felt unable to because when they seek additional funding for acquisitions, banks will re-price their entire facility at the new rates with associated costs. It seems to be stifling activity.

MC - Again, this depends what the deal is, what the client wants to achieve, and what the sustainable cashflows within the proposal are. We can, of course, consider projects on a ring fenced basis - ie not disturbing existing loans - but then the debt leverage and cashflows of the new deal also need to be ringfenced. This therefore triggers the question of the level of ingoing equity into the new deal and where it’s coming from ie is it new cash in, or are they leveraging against something else, as has been common practice in the past? This question of leverage is a key point - it’s been suggested by many economic commentators that UK PLC needs to de-lever, and the care home industry has it’s fair share of debt leverage within. RBS has always considered lending into this sector based upon the sustainable cashflows within the business, alongside management capability, with LTV being a more secondary focus.

IW - We can’t discuss conditions in a tougher climate without inevitably touching on the issue of insolvencies. We are certainly seeing significant increases in insolvency rates in other sectors and although this has not been a major issue in healthcare to-date, there has been a steady flow within the care sector over recent months. What do you think we can expect to see over the coming year - is insolvency and appealing way for banks to recover capital?

MC - No. Insolvency is always the last resort. We would always rather work with our customers and give them support to get through difficult times. With regard to insolvencies that have happened in the sector, I think it is more important that we understand what caused them. Was it management, leverage, inherent costs?

IW - With the collapse of the house-building sector, we are seeing huge numbers of sites being made available as having potential for care homes. What is the bank’s position on funding new development?

MC - I think you have to ask is it right that just because the land is available you should build a care home on it? We would encourage our customers to look very closely at the competition, demographics and source of funding, be that local authority, private or a blend of the two. Rather than pursuing landbank, portfolio operators may now look inwardly at their existing stock, improving existing facilities and extending on land they already own. We will consider funding turnkey units but each would have to be closely analysed to take into account start-up losses associated with buying an empty building. Equity input will again be an important factor.

IW - There is an increasing emphasis in quality standards in the care sector exemplified by the new Care Quality Commission launching in April and an increasing trend for local authorities toward quality related fee scales. Can you see bank lending taking a similar route?

MC - I think that fundamentally we have always lent to quality businesses and that won’t change. We have always looked very closely at inspection reports and operating history, but each business must be assessed on its own unique characteristics . Management experience and capability is a key area for us

IW - So as a final thought, given all the troubling news around macro-economic issues, how does the future look for the healthcare sector?

MC - What I would say is that we remain a big supporter of the healthcare sector and we are in it for the long term. There are opportunities to improve long-term elderly care, in domiciliary care, and to offer new solutions for client groups requiring specialised care. We can all see the challenges facing the economy but in the end we will come through this and I believe the care sector can emerge even stronger for it.

Mike Coster is an Associate Director in the Commercial Banking Healthcare team at The Royal Bank of Scotland. Contact 07799 034707.

January 2010