UPDATE 2-H&R Block taps bank credit lines, slapped by ISS

(Recasts lead; adds ISS recommendation, background)

By Joseph A. Giannone

NEW YORK, Aug 22 (Reuters) - H&R Block Inc (HRB.N) on Wednesday said it tapped bank credit lines twice in the past week as it struggled with funding challenges stemming from its money- losing subprime mortgage unit.

Block also suffered another setback when influential proxy adviser Institutional Shareholder Services said investors should elect a slate of three dissident directors.

Shares of Block, which have been punished by investors for the company's ill-fated foray into subprime mortgages, fell another 2.5 percent.

Block, the largest U.S. tax-return preparation company, said its Block Financial unit tapped bank credit lines twice in the past week after skittish debt markets cut off access to short-term financing.

Block said it drew down $200 million from working capital on Aug. 16, which was then repaid with a second draw of $850 million on Monday. H&R Block says it has $2 billion available in committed bank loans that mature in 2010.

"The credit markets have become increasingly constrained and unstable," Block Chief Financial Officer William Trubeck said in a statement. "We have decided to substitute this more stable source of funds to support our short-term needs."

Block Financial's decision to tap its bank lines comes a week after Countrywide Financial Corp. CFC.N, the largest U.S. mortgage lender, drew down $11.5 billion from bank lines as short-term debt markets seized up.

On Tuesday Moody's Investors Service on Tuesday downgraded Block Financial debt to Baa1, from A3, citing concern that continued mortgage market turmoil might scotch the sale of its Option One Mortgage unit.

Institutional Shareholder Services recommended H&R Block shareholders vote in favor of three directors nominated by Breeden Partners, an activist investment firm led by former U.S. Securities and Exchange Commission Chairman Richard Breeden.

"We conclude that the company's long-term underperformance can be traced to either a failed diversification strategy or poor execution," ISS said in its report.

Breeden since late June has campaigned to add himself and two other partners to Block's board, arguing directors stood watch over years of poor performance. He noted that Block's acquisition of Option One Mortgage was a costly mistake that has dragged on the stock and distracted management.

ISS in its report raised many of the same issues. It said Block lagged the S&P 500 Index by 92 percent over the past five years and underperformed tax preparer Jackson Hewitt Tax Service Inc. (JTX.N) by 80 percent since its rival went public in June 2004.

H&R Block said it was "disappointed" that ISS threw its support behind the dissidents. H&R Block Chief Executive Mark Ernst said the current board is "the best team" to oversee the company's efforts to sell Option One and revive performance.

Block reiterated its claims that Breeden's statements are misleading and don't provide adequate disclosure about his business relationships.