H&R Block: Could Need Financing

In a regulatory filing, the tax preparer said it was running up against its available credit limit.
Author:
Publish date:

H&R Block

(HRB) - Get Report

may need additional financing as it struggles to get out from under subprime mortgage-related losses, the company said Thursday in a regulatory filing.

The nation's largest tax preparer on Tuesday reported a $503 million third-quarter loss, primarily due to losses from its discontinued subprime mortgage activities through its Option One subsidiary. In a 10-Q filing Thursday with the

Securities and Exchange Commission

, H&R Block said it had drawn down $1.8 billion of $2 billion in available lines of credit.

"A further disruption in credit markets, or a violation of covenants under our

committed lines of credit could adversely affect our access to these funds," H&R Block said in the filing. "In addition, it is possible that the borrowing capacity under our CLOCs may not be sufficient to meet our financing needs."

H&R Block also said it could issue additional debt or equity securities to finance operations.

The news comes as the Kansas City, Mo.-based tax services provider delayed the filing of its quarterly report with the SEC, originally due out on Monday. The company said that its new accounting firm, Deloitte & Touche, had not had enough time to complete its review of certain mortgage loan sales by its subprime mortgage business Option One.

Shares dropped 80 cents or 4.1% to $18.62.

The private-equity firm Cerberus Capital Management, which had agreed to purchase Option One in April, called off the deal on Dec. 4, after months of unsettlement. Amid worsening conditions in the mortgage industry, the two firms had "worked to identify mutually acceptable alternatives" for restructuring the agreement, but they couldn't reach a new pact, H&R Block said earlier this week along with the filing delay.

H&R Block said it will halt all remaining origination activities, cease taking new loan applications and look to sell Option One's servicing business. The firm will eliminate about 620 positions at Option One and close three offices.

The winding down if its mortgage lending business will result in a pre-tax restructuring charge of $74.8 million, which will cover severance and lease termination costs, the write-off of property, plant and equipment and related shutdown costs, the firm said in the filing. Of the total charge, H&R Block incurred $35 million in the quarter ending Oct. 31. The remaining charge will be taken in the quarter ending Jan. 31, it said.

Loans in the pipeline at the end of October totaled $69.4 million. The company said that "only approximately $20 million to $30 million of these loans will ultimately be funded, at which time our mortgage origination activities will cease," in the filing. H&R Block expects a majority of those loans to be eligible for sale to

Fannie Mae

or

Freddie Mac

.

Mortgage loans held for investment totaled $1.1 billion at quarter's end.

The company recorded a loan loss provision of $9.8 million for the quarter, but future resets expected for subprime adjustable-rate mortgages "could also lead to increased delinquencies in our mortgage loans held for investment," H&R Block said.