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Companies linked to Southern Cross Healthcare could become responsibility of bank, which lent to them in 2007

The taxpayer-backed Lloyds Banking Group could shortly find itself the owner of a string of care homes housing many thousands of Britain’s most vulnerable elderly residents, as a second wave of financial troubles hits companies linked to failed Southern Cross Healthcare.

Through its notorious Bank of Scotland corporate lending unit, then headed by Peter Cummings, the bank was among a handful of lenders who became rapidly interested in the care home sector before the advent of the credit crunch in 2007.

Bondcare, which owns 39 homes formerly operated by Southern Cross, is among the companies that could see itself – in part or entirely – transferred to Lloyds. No part of Bondcare is insolvent but this summer Bank of Scotland appointed receivers from Ernst & Young to part of the business.

Meanwhile, Bondcare’s chief executive, Leib Levison, has stepped down from the board of several group subsidiaries. The holding company, BC Limited, has not filed accounts since September last year, at which point it said: “The group is dependent on continued support of its lender.” Part of the group has changed its name to Akari Care.

Elsewhere, Lloyds Banking Group’s controversial Uberior Ventures investment arm has a stake in another care home landlord group called PSX, which owns 21 properties. PSX sites were largely run as Southern Cross homes until the operator unravelled last year and the landlord group was forced to find another operator, receiving much lower rents. Alongside Lloyds on the share register, PSX is co-owned by the investment tycoons Nick Leslau, Nigel Wray and Tom Hunter. Lloyds is nearly 40% owned by the taxpayer,

Accounts filed last month reveal that PSX made a pre-tax loss of £3.3m for the year to September 2011. It owes £100m to Lloyds – loans on which the group has already defaulted because of the Southern Cross fiasco. The bank has promised not to call in the loan until the end of this month in the hope that a sale or debt restructuring deal can be reached.

In March Cummings’ corporate division within Bank of Scotland was identified in an investigation by the Financial Services Authority as having been guilty of “very serious misconduct”, for which Lloyds only escaped a “very substantial penalty” because the conduct dates from before its parent, HBOS, merged with Lloyds and received a huge taxpayer bailout.

Lloyds is not the first bank to find itself heavily exposed after backing the forays of financial engineers into the care home sector. Four Seasons Health Care, which operates 445 homes and looks after 22,000 people, was sold in July by Royal Bank of Scotland, which is 40% owned by taxpayers. The deal took place only after the bank twice wrote off hundreds of millions of pounds of investment.

Four Seasons was bought by Terra Firma, the private equity business run by Guy Hands, which hopes to add other distressed care home groups to expand the business.

Hands was one of the pioneers of the new techniques in financial engineering that fuelled the UK private equity boom between 2002 and 2007. The borrowings he has used to acquire Four Seasons, however, are to reduce its debt burden.

For the past three years Hands has been living in Guernsey, in effect a tax exile from the UK.