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20 Oct 2010
Approximately $1 billion of rated debt securities affected
New York, October 20, 2010 -- Moody's Investors Service ("Moody's") downgraded the long-term
rating of Block Financial LLC (Block Financial) to Baa2 from Baa1,
and affirmed its Prime-2 short-term rating. Block
Financial, a wholly-owned subsidiary of H&R Block,
Inc. (Block), is the issuer of all of Block's corporate
public debt. This rating action concludes the review for possible
downgrade initiated on August 13, 2010. The rating outlook
The following ratings were downgraded:
Senior unsecured notes to Baa2 from Baa1
Medium term note program to (P)Baa2 from (P)Baa1
Senior unsecured shelf registration to (P) Baa2 from (P)Baa1
The following rating was affirmed:
Prime-2 commercial paper
For additional information please refer to the Credit Opinion of Block
Financial on Moodys.com.
"The downgrade of Block Financial's long-term ratings to
Baa2 reflects declining tax return volumes over the last two years,
the risk of further market share losses in the bricks and mortar segment
to digital products over the medium term, regulatory and business
risks related to financial settlement products and financial strength
metrics that are more appropriate for the Baa2 rating category,"
says Moody's Senior Lenny Ajzenman. "The ratings are supported
by the company's leading market position and brand in the bricks
and mortar tax business, solid operating margins and an expanded
digital presence and potential synergies resulting from the recently announced
acquisition of the developer of TaxACT digital products,"
adds Mr. Ajzenman.
The negative outlook reflects concern that Block's financial performance
in fiscal 2011 could materially decline due to the elimination of the
"debt indicator" by the IRS, negative tax return volumes
by Block over the last two years and the recent litigation by Block against
HSBC related to their contract for the provision of financial settlement
products. Block alleged that HSBC has refused to perform under
a 2005 contract that requires HSBC to provide refund anticipation loans
(RALs) and refund anticipation checks (RACs) to Block clients.
Income from financial settlement products constitute a material portion
of Block's profitability and are an important driver of customer
traffic to its offices. A disruption in Block's ability to
offer instant RALs or RACs in the 2011 tax season could lead to a material
decline in profitability. Moody's will monitor developments
in the pending litigation between Block and HSBC as well as Block's
strategies to minimize any adverse impacts to its business. The
negative outlook also considers the risk that a significant step-up
in valid claim repurchase volumes or a change in estimate of expected
loss rates could lead to a material increase in Block's repurchase
reserve related to its legacy mortgage business.
The affirmation of the Prime-2 short term rating reflects the company's
adequate liquidity profile, characterized by a sufficient committed
bank facility relative to peak short term borrowing needs and stable,
though highly seasonal, cash flow generation.
The ratings could be downgraded if (i) the litigation with HSBC leads
to an adverse outcome for Block and it appears that Block's ability
to offer financial settlement products will be substantially diminished
(ii) tax return volumes, revenues or profitability decline significantly
in fiscal 2011; (iii) the company implements more aggressive financial
policies or experiences further instability at the management or board
level; or (iv) valid claim trends indicate a substantially greater
than expected repurchase liability related to its legacy mortgage business.
Given the negative outlook and weak tax return volume trends of the last
two years, an upgrade is unlikely in the near term. However,
the outlook could be changed to stable if during the 2011 tax season the
company demonstrates (i) steady tax return volumes in its retail network;
(ii) an effective offering of instant RALs, RACs and other financial
products to its customer base; (iii) steady revenues and profitability;
and (iv) solid growth in the digital business. Over the medium
term, upward rating pressure could develop if (i) the company achieves
sustained revenue and profitability growth over the next two to three
tax seasons with improving performance in the retail network, financial
settlement and digital products; (ii) debt to EBITDA and free cash
flow to debt are expected to be sustained at about 2 times and over 15%,
respectively; (iii) the company demonstrates management and board
level stability and a commitment to conservative financial policies;
and (iv) exposure to contingent liabilities declines.
Block, through its subsidiaries, provides tax, banking,
business and consulting services. The majority of the firm's profitability
is generated by the preparation of tax returns through the company's bricks
and mortar retail network and through financial settlement products to
primarily lower income customers. Revenues for the fiscal year
ended April 30, 2010 were approximately $3.9 billion.
The principal methodologies used in rating Block Financial LLC were Global
Business & Consumer Service Industry published in October 2010.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Lenny J. Ajzenman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades Block Financial to Baa2; outlook negative
250 Greenwich Street
New York, NY 10007
No Related Data.
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