H&R Tastes Credit Crunch

A storm is brewing at H&R Block(HRB Quote).

Shares fell 4% after the Kansas City, Mo.-based tax services provider became the latest financial company to face problems raising money in the market for short-term loans known as commercial paper.

Block said it had to draw down some bank credit lines when its Block Financial unit was locked out of the commercial paper market. Other big financial companies, including mortgage giant Countrywide (CFC Quote), have been forced to tap their bank lines after other market-based funding sources dried up.

Block's bank drawdown came as a big proxy adviser sided with dissident shareholders mounting a proxy campaign. Institutional Shareholder Services recommended investors side with activist investor Breeden Partners.

Breeden, a hedge fund and investment firm founded by former SEC chairman Richard Breeden, is attempting to gain three seats on H&R Block's board to improve shareholder returns. The Greenwich, Conn.-based firm intends to nominate three individuals, including Mr. Breeden, at H&R Block's annual meeting slated for Sept. 6.

ISS, a Rockville, Md.-based proxy-voting firm, said that new board members will help H&R Block overcome the challenges it is experiencing as a result of diversifying too far away from its core business.

"The company's long-term underperformance can be traced to either a failed diversification strategy or poor execution," ISS said in a report. "While the company already is trying to divest its troubled mortgage unit (some would argue a day late and a dollar short), we believe that the company will continue to face other challenges, including what to do about the poorly performing brokerage unit, whether the benefits of the bank outweigh the drawbacks and the continued competitive pressure in the core tax prep business. A new shareholder perspective on the board should help to meet these challenges."