H&R Block subprime sale may collapse

H&R Block subprime sale may collapse
By Daniel Pimlott in New York
Copyright The Financial Times Limited 2007
Published: August 30 2007 14:37 | Last updated: August 30 2007 14:37


H&R Block, the US tax preparer, on Thursday said that the sale of its subprime lending unit to a private equity firm may fall through as it reported a loss in its first quarter.

In April H&R Block agreed to sell Option One, which provides subprime loans, to an affiliate of Cerberus Capital Management for $300m less than its tangible assets at the close of the deal, which were roughly $800m at the end of April.

Now the company has warned that it has been forced to re-enter negotiations with the private equity firm over the terms of the sale, because “certain closing conditions of this agreement currently are not being met”.

H&R Block said that while it “hopes to conclude these negotiations soon, the company cannot be sure that it will be able to do so” and warned that “there can be no assurance [the deal] will close.”

The parts of the deal currently under discussion include the condition that Option One would have $2bn in loans funded within 60 days of the deal closing and $8bn minimum in warehouse lines. H&R Block may now also divest or wind down Option One’s remaining mortgage origination business.

The company said it should know by December 31 whether the deal will go through. H&R Block said in a conference call with analysts that it plans to exit the mortgage business.

H&R Block made a net loss of $303m, or 93 cents per share, against a loss of $131m, or 41 cents per share, a year ago. Revenues rose 11 per cent to $381m.

Loss from discontinued operations, which includes the results at Option One as well as two other smaller mortgage businesse, was $192.8m

In the Option One business, the company said that it had tightened its underwriting criteria so that loans it makes offer clear access to the secondary market for mortgages and limit the company’s capital commitments.

Demand for mortgage backed securities has plummeted in recent weeks as investors steer clear of exposure to the deepening housing slump.

”Given the unprecedented disruption in the credit markets, in August we took action to limit any more exposure to non-prime mortgage originations by stopping all but Fannie Mae and Freddie Mac-eligible loans,” said Mark Ernst, chairman and chief executive.

Shares in H&R Block dropped 85 cents or 4.4 per cent to $18.65 in pre-market trade.