By Jochelle Mendonca
BANGALORE (Reuters) - Jackson Hewitt Tax Service Inc
Jackson Hewitt got into trouble with its lenders as it failed to secure full funding for tax-refund loans, a key covenant in its credit agreement.
Tax-refund loans, also known as refund anticipation loans (RALs), are offered by tax preparers and funded by various banks, but 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
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 LLC declined to comment and the company did not immediately reply to calls requesting comment.
TERMS OF THE PLAN
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
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 and Nick Brown in NEW YORK; Editing by Anil D'Silva and Sriraj Kalluvila)
