BANGALORE/NEW YORK (Reuters) - Jackson Hewitt Tax Service Inc JTHX.PK filed for a pre-packaged Chapter 11 bankruptcy, as the second largest U.S. tax preparer finally reached an agreement with its lenders on how to restructure its debt.
Jackson Hewitt got into trouble with lenders as it failed to secure full funding for tax-refund loans, a key covenant in its credit agreement.
Tax-refund loans, or refund anticipation loans (RALs), are offered by tax preparers and funded by various banks. Banking regulators are clamping down on such loans, calling them unsafe.
Jackson Hewitt received waivers on the covenants in the past, but the regulatory clampdown made it virtually impossible to secure funding for the loans, making further waivers unlikely, setting the stage for a pre-packaged bankruptcy.
While under bankruptcy protection, Jackson Hewitt said it would have the liquidity to operate in the normal course of business and begin preparations for the 2012 tax season.
However, Jackson Hewitt in its business plan has excluded any revenue from tax-refund loans, as it is doubtful that it would manage to secure the funding.
Jackson Hewitt earns most of its revenue during the tax season from November to April through its franchises and tax preparation agreement with Wal-Mart Stores (WMT.N). In 2010, about 24 percent of the tax returns prepared by the company were generated in Wal-Mart stores.
In pre-arranged bankruptcies, companies and their creditors agree on a reorganization plan prior to the filing, finding it an efficient way to get through the court process. Companies that make pre-packaged filings are often able to exit court protection in 30-90 days.
Jackson Hewitt expects its restructuring plan to be fully implemented in 45-60 days and sees no disruption in its day-to-day operations.
In March, Jackson Hewitt said it was working with its lenders on a restructuring plan that could include a pre-packaged bankruptcy as it struggled to deal with its ballooning debt.
In court papers, the company listed assets of $388.6 million and debt of $444.8 million. The Chapter 11 petition also included five affiliates of the company.
Jackson Hewitt’s lawyers Skadden, Arps, Slate, Meagher & Flom LLP declined to comment and the company did not immediately reply to calls requesting comment.
Moelis & Co, Jackson Hewitt’s financial adviser in the restructuring, also declined to comment on Tuesday.
In its filing, the company said a quick exit from bankruptcy would help it put its aggressive plans for expansion into action, as it prepares for the 2012 tax season.
Without tax-refund loans, tax preparers are more dependent
on fees from filing tax returns, a business in which they are facing stiff competition from companies like Intuit (INTU.O), which make software that help people file their own taxes and analysts expect the sector to begin to consolidate.
Traditional tax preparers such as Jackson Hewitt and H&R Block Inc (HRB.N), its larger rival, and privately held Liberty Tax will have to begin competing more aggressively to attract customers, even as they lose the ability to issue tax refund loans, their most popular product.
Under the terms of the proposed plan, Jackson Hewitt’s current secured lenders will receive their pro rata share of a new $100 million term loan and all the equity in the reorganized company.
Jackson Hewitt expects its new equity to be privately owned. However, all its existing equity will be canceled.
Jackson Hewitt said it anticipates entering into a new $115 million revolving credit facility on consummation of the plan.
Earlier this month, the New York Stock Exchange said it would suspend trading in the troubled tax preparer’s shares. The stock’s value has nearly been wiped out over the last six months plummeting from $2.45 in December, to 7 cents apiece on Tuesday on the pink sheets.
Shares of larger rival H&R Block Inc (HRB.N), which would likely gain from Jackson Hewitt’s woes, were up about 3 percent at $16.72 on the New York Stock Exchange.
The case is In re: Jackson Hewitt Tax Service Inc, U.S. Bankruptcy Court, District of Delaware, No. 11-11587.
Additional reporting by Santosh Nadgir and Brenton Cordeiro in Bangalore; Editing by Anil D'Silva, Sriraj Kalluvila and Joyjeet Das