When Bill Colvin, the chief executive of Southern Cross Healthcare, decided in March to borrow £46m to finance the acquisition of 20 new nursing homes, he thought it would be a straightforward transaction.

The plan was to sell the underlying property in the nursing homes to real estate investors and lease them back, thus allowing the company to acquire the operating business with minimal impact on cash flow.

There appeared to be little reason to worry. After all, this sale and leaseback structure - commonly referred to as a "free op-co" or operating company - has been the backbone of Southern Cross's growth strategy, helping to fuel the group's explosive growth from a 4,000 bed outfit less than 10 years ago into the UK's largest nursing home operator, with 37,672 beds.

Along the way, it also made Southern Cross a City darling. At their high point last year, shares in the company were worth more than double their price in 2006 when it was floated by Blackstone, the private equity group.

But with the debt market in turmoil and property values plummeting, healthcare analysts have cautioned that banks' appetite to back this type of structure is on the wane.

The sustainability of the model was thrown into sharp relief after the company revealed that it had failed to repay banks the £46m by Monday's deadline and had to ask its lenders to agree a temporary waiver of banking covenants.

The company said that while it had received indicative offers for the assets it was trying to sell, it had not yet sold them. Banks have given the group an extension until July 28 and a waiver of financial covenants until then.

"The buyer we were in talks with walked away," said Mr Colvin. "What we should have done was immediately ask the banks to extend the loan, but we didn't, and I guess that is why we are in the debacle that we are today."

The opco/propco (operating company/property company) structure is a cheap way to buy into the healthcare sector, but analysts highlight the dangers.

"It's just like pubs," said one analyst. "When you own your own property, you have more protection from any downturn because you don't have to worry about rent. The sale and leaseback model has allowed Southern Cross to grow very quickly with very little equity, but the downside is that when things swing the other way, you are also going to take a bigger hit."

While the business fundamentals in the £12bn-a-year elderly care sector have been good, there are a number of headwinds facing the groups that operate in this sector in the coming years.

The biggest risk for Southern Cross is that wage inflation might not be compensated for by price increases. At the same time, local authorities, which account for the bulk of the group's revenue, are also looking to shift old-age provision away from nursing homes.

As a result of such factors, Southern Cross said that for the year to end- September, earnings were "unlikely to exceed £80m", compared with £66.8m in the previous year. Only last month the group reported underlying interim profits growth of 41 per cent and raised the interim dividend from 2.5p to 3.75p.

Southern Cross's woes are not unique. Qatar Investment Authority, which owns the third-biggest portfolio of nursing homes in the UK, is facing sizeable losses.

The QIA, which through its Delta fund acquired Care Principles, NHP, Senad and Four Seasons at a total cost of £3bn, is in the midst of renegotiating the bulk of that financing.

The news from Southern Cross caps a trying six months for the group. Jason Lock, who resigned as finance director on Monday, only started in the job in January, when his predecessor, Graham Sizer, resigned hot on the heels of then chief executive Philip Scott.

Their departures - and the large share sales from both men that preceded them - triggered a sharp downturn in sentiment on Southern Cross stock. Having risen to a high of 606p in 2007, shares in the company subsequently collapsed, falling on Monday from 313p to 130p.

Mr Colvin said the company was now reviewing its business model in light of the altered state of the credit markets: "Clearly, with the credit markets where they are, we have to put in place a funding structure substantially more long-term," he told the Financial Times.

No other acquisitions are on the cards, he said.