Jackson Hewitt gets 80% RAL funding, shares soar

(Reuters) – Jackson Hewitt Tax Service Inc (JTX.N) said it could fund 80% of its refund anticipation loan (RAL) program and would secure a longer-term covenant waiver with its lenders, sending the company’s shares up 35%.

Jackson Hewitt said it amended an agreement with its RAL funder Republic Bank & Trust Co, a unit of Republic Bancorp Inc (RBCAA.O), allowing it to allocate RAL funds to offices based on volume, thereby covering 80% of anticipated funding requirements for the 2011 tax season.

For most of 2010, the company has struggled to fully fund its RAL program, putting it at risk of defaulting on credit agreements, which depend on it having 100% funding.

The No. 2 U.S. tax preparer last received a covenant waiver on November 19 extending the date by which it must submit its RAL funding documents to Dec. 17.

On a conference call, the company said it would not get 100% RAL coverage for 2011, and expects to obtain a longer-term waiver to amend RAL funding conditions by Dec. 17.

The company, which competes with larger rival H&R Block Inc (HRB.N), said on Thursday it secured full coverage for its assisted refund product that targets people who might otherwise not be able to afford its services.

The coverage and funding of its loan and assisted refund products gives Jackson Hewitt a competitive advantage over H&R Block, whose RAL funding is in doubt as it sues its funding provider HSBC USA, a unit of HSBC (HSBA.L).

“I would expect if Block does not have RALs we will benefit,” a company executive said on the conference call.

For the 2010 tax season, H&R Block had expected to benefit from Jackson Hewitt’s inability to secure full funding.

RALs, which usually last 7-14 days until taxpayers receive their refunds from the U.S. Internal Revenue Service (IRS), are highly profitable for tax preparers.

However, these loans have come under fire from consumer groups over concerns that high U.S. unemployment is forcing people to borrow short-term at high rates. This has led banks like JPMorgan Chase & Co (JPM.N), which used to fund independent tax preparers’ RALs, to stop funding these loans.

In August, RAL programs were hit when the IRS said it would stop issuing a “debt indicator” — which indicates how much a tax preparer can lend to its customer safely.

Jackson Hewitt also posted a narrower-than-expected second-quarter loss on Friday.

The Parsippany, New Jersey-based Jackson Hewitt’s shares, which rose nearly 34% on Thursday after it secured full assisted refund coverage, climbed another 35% to $1.48 on Friday morning. They were trading at $1.46 midday on the New York Stock Exchange.

H&R Block’s shares were down about 1% at $12.98.

(Reporting by Jochelle Mendonca in Bangalore; Editing by Roshni Menon)