Fitch Affirms H&R Block's IDR at 'BBB'; Outlook Stable

Business Wire, Oct 22, 2008

NEW YORK -- Following H&R Block Inc.'s (H&R Block) sale of $145 million of common equity to enhance capital and maintain financial flexibility, Fitch Ratings has affirmed the following ratings:

H&R Block:

--Issuer Default Rating (IDR) at 'BBB';

Block Financial Corp:

--IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Short term IDR at 'F2';

--Commercial paper rating at 'F2'.

The Rating Outlook is Stable.

The ratings and Stable Outlook reflect the following considerations:

--H&R Block reported solid 2008 tax season results with revenue in its Tax Services segment up 13.4% in fiscal fourth-quarter 2008 (end April 30) as Fitch believes the company took market share from its largest competitor this season;

--Fitch estimates, as of July 31, 2008, H&R Block's leverage (total debt/total operating EBITDA) at 1.4 times (x) with adjusted leverage (total adjusted debt/total operating EBITDAR) at 3.3x. Fitch expects that the company will add additional debt during the tax off-season to fund working capital needs, as is typical of the business, with leverage peaking near 3x;

--Fitch expects H&R Block to focus on cash generation and increased retained earnings through fiscal 2009 before reinitiating its share buyback plans in fiscal 2010;

--H&R Block should continue to benefit from stable and consistent cash flows generated by its consumer tax preparation services business which Fitch estimates should generate up to $500 million in free cash flow under normal operating conditions.

Credit strengths include the company's leading position in the consumer tax-return services market which Fitch expects is expected to remain a highly stable and predictable end-market. Credit concerns include minimal diversification beyond consumer tax preparation services in the U.S. and under-performing non-core assets in its financial advisory business, which is currently under contract to be sold to Ameriprise Financial for approximately $315 million with an estimated completion in early calendar 2009. Additionally, Fitch expects the company to utilize the majority of free cash flow beyond fiscal 2009 for share repurchases which could limit additional strengthening of the balance sheet.

Fitch estimates total liquidity was adequate as of July 31, 2008, at approximately $2.4 billion consisting of $356 million in cash and an undrawn $2 billion revolving credit facility expiring August 2010.

H&R Block's revolving credit facility agreement contains a net worth covenant requiring the company to maintain a minimum net worth of $650 million. H&R Block's net worth typically declines by several hundred million dollars between tax seasons. Fitch believes that the successful equity offering should provide the company with ample equity to avoid any potential issues accessing its credit facility before the 2009 tax season begins. As of July 30, 2008, the company's net worth was approximately $837 million.

Fitch estimates total debt as of July 31, 2008, to be approximately $1 billion consisting of $400 million in 5.125% senior unsecured notes due October 2014 and $600 million in 7.875% senior unsecured notes due January 2013. The company also has $100 million drawn from the Federal Home Loan Bank due April 2009 which Fitch excludes from its leverage calculations.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.