Shares in Southern Cross, Britain’s biggest care homes operator, plunged by 58 per cent yesterday after it failed to make a debt repayment.

The industry has been hit by local authority budget constraints and higher costs from a rising minimum wage. As a result, many companies, including Southern Cross, are highly leveraged and are vulnerable to more difficult credit markets.

Southern Cross, which usually buys care homes then sells the freehold to a property company and pays rent on it, has been unable to offload the property attached to some recent purchases as the property market has declined. It has not been able, therefore, to pay back a £46 million loan facility, led by Barclays, which was supposed to have been cleared yesterday. The banks have agreed to renegotiation but the company is likely to have to pay higher interest.

Jason Lock, the finance director, is to be replaced by Richard Midmer, previously the finance director of NHP, where Bill Colvin, the chief executive of Southern Cross, once worked.

Mr Colvin told The Times: “The banks have been pretty supportive. We need to give ourselves more time. In hindsight, we shouldn’t have bought [other homes] in February.”

To compound its woes, the company said that its homes were less full than expected. It had an occupancy rate of 90 per cent at an average of £530 a week per resident. Local authorities have found it cheaper to keep elderly people at home.

Paul Safar, the chief executive of LCS Healthcare, the consultant, said: “The care homes sector is cyclical and the cycle has turned down. The margins of two or three years ago will likely be squeezed and fall at least 5 per cent in the next two years.”

Sahill Shan, healthcare analyst at Brewin Dolphin, said: “I think part of the market reaction to the news happened because investors were fearful the banks were going to pull the plug on Southern Cross. This is a risk, but we don’t think it’s likely for £46 million given that the company has £70-80 million earnings before tax.”

— Shares in Care UK, the care home operator, fell by 12 per cent yesterday after the company said that it was in discussions to buy the 50 per cent of its joint venture Partnership Health Group that it does not already own. Care UK’s shares closed at 375p.

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