Posts Tagged ‘Lehman Brothers’

From 2013: Private Eye on Complex Corporate Structure and Dodgy Accounting of Private Health Contractor

April 15, 2014

This is from the Eye’s edition for 22nd March – 4th April 2013.

NHS PLC

Broken Circle

Worrying symptoms of Enron-it is have broken out at groovy health company Circle Health which, in partnership with its staff, runs NHS facilities and a group of private hospitals.

Circle’s parent company, Circle Holdings plc, is owned largely by hedge funds, including Crispin Odey’s Odey Asset Management and Sir Paul Ruddock’s Lansdowne Partners, plu8s the offshore trusts of founder and ex-Goldman Sachs banker Ali Parsa. As 51 percent controller of the Circle Health group that now runs Hinchingbrooke NHS hospital trust in Cambridgeshire, as well as the Nottingham NHS treatment centre, it might be hoped that the company’s financial position is above board and fully understood.

Alas, corporate transparency is in even shorter supply than profits at the struggling firm, especially when it comes to financing what it describes as its “flagship” private hospital in Bath (which earns two-thirds of its income from the NHS). The hospital is owned not be Circle Health but by a Jersey company called Health Properties (Bath) Ltd, which leases the building back to Circle in the UK. Given its offshore status, the finances of this company are secret; but clues in Circle Holdings’ accounts suggest it has debts of around £40m (on some of which it has already defaulted), funding a hospital worth about £35m.

As the Bath hospital is very much part of Circle’s business, these amounts would ordinarily be “consolidated” in Circle Holdings’ balance sheet – increasing its overall debt figure. But this is where the “off balance sheet” trick comes in. Health Properties (Bath) Ltd is owned not just by the Circle group, which has 1,200 B shares in the company, but by two other companies as well; one called Health Estates Ltd, with 1,800 B shares, plus the European arm of Lehman Brothers (in, ahem, administration) with 100 A shares. This structure, says Circle, means it owns just 38.7 percent of the property company and can keep it off its books.

Closer scrutiny, however, shows that Health Estates Ltd (also a Jersey company) is managed by yet another company, Health Estates Managers Ltd (ditto), that is wholly owned by Circle. And when it comes to voiting on matters concerning Health Properties (Bath) Ltd, it has agreed to do whatever Circle tells it to. Since the A and B shareholders appoint equal numbers of the property company’s directors, this means control is nominally shared by Lehmans (in administration) and Circle. But in practice the Lehman administrators, Pricewaterhouse Coopoers, are unlikely to demur from Circle’s wishes, not least given their clear conflict of interest as Circle Holdings’ auditor with duties such as signing off the strange arrangement every year.

An accountancy rule known as SIC-12 says that if a company in substance controls what is known as a “special purpose entity”, such as Health Properties (Bath) Ltd, its results and its assets and liabilities should be consolidated in the holding company’s figures. Other indications that this ought to happen include where the special entity’s assets – such as a big hospital – is used for the wider group’s benefit, as it is here.

Circle Holdings’ latest figures show debts of around £55m. Adding in the Bath debt would take that towards the £100m, which would not look good as the loss-making company – from which Parsa recently departed – repeatedly goes cap in hand to the City to stay afloat while running vital health services. Nor would it be too reassuring for the taxpayer given its reliance on the firm.

MPs on the public accounts committee have already expressed concern over the Hinchingrooke deal, pointing out that “the NHS can never transfer the operational risk of running a hospital, leaving the taxpayer exposed should the franchise fail”. Handing hospitals to companies with offshore, off balance sheet property schemes might not have been the healthiest option.

This is of particular interest to people in the Bristol/ Bath area, as Circle Health’s hospital in Bath was opened last year with some fanfare. It was featured on the local news, if I remember correctly, and adverts for it have appeared in Bristol and, doubtless, some other areas. Yet the company is clearly saddled with massive debt, which it has attempted to hide through a complex off-shore corporate structure intended to keep it off the balance sheet. And it’s partly owned by Lehman Brothers, who were partly responsible for the financial crash in 2010. Given this history and background, it’s questionable that such a company should ever have been given control of NHS hospitals, regardless of the wider issues of the supposed superiority of private enterprise.