Increased risks for commissioned markets of provider failure in the residential children’s care market due to financial pressures

This is not a good time for businesses dependent upon borrowings, unless they have protected their exposure through a locked in rate or a hedging instrument.

Thursday 23rd March 2023 saw another increase in the bank rate to 4.25%.

Jill Treanor writing in The Times (Saturday 25th March[i]) expands on other growing pressures within financial markets – describing a potentially perfect storm.  Factors include the recent collapses and bail outs within the banking industry, pressure on private equity resulting in it needing to refinance, and the increase in scrutiny on borrowers following the pandemic.

The housing market is showing signs of slowing.  The Nationwide House Price Index[ii] showed a 1.4% drop in November 2022 and 0.5% in February 2023.  As this is a compounding fall – it is a further trend that will impact those borrowers who have high leverage secured against property as the ratio of their loan to value increases, in some cases bringing them closer to the safe limits that banks will tolerate, especially as their tolerance is reducing.

What does this mean for Children’s Services?  Alex Crow, Partner at Coral Reef says, “There is an increased risk of Provider failure in residential care markets and likely some pack shuffling when it comes to the private equity market.  A further concern is that smaller providers operating two or three bedroomed homes may now be seeking to grow their footprint by leasing property rather than purchasing: this extends Commissioners’ risk into the private landlord market”.

The answer to this is to have a local market which has a spread of risk – across several independent Providers.  Whilst this takes time to develop, in the meantime it is incumbent on Commissioning Authorities to assess their exposure to risk and develop contingency plans.

We all hope that the storm will blow over, but the likelihood is that it is set for a while at least and may get worse.  Instability in the banking market will have lasting consequences whilst the Bank of England may reduce interest rates if inflation settles.

Provider failure is the worst consequence for Children’s Services, followed closely by increasing fee rates as Providers seek to recover their costs.  The dilemma for Commissioners will be whether to protect their budget and resist approaches for increased fees, or protect the stability of their local market by working with Providers, mindful of the pressures that they may be experiencing.  At Coral Reef we stress to our local authority colleagues that sustainable market shaping is built on relationships not cold contracts: investing in those relationships has never been more important.