Loss of Credit Line Imperils H&R Block Deal

The collapse of $1.5 billion in warehouse financing threatens Block's sale of its subprime mortgage unit to Cerberus Capital Management.

H&R Block has warned that the $1.5 billion warehouse-financing facility that its Option One Mortgage Corp. (OOMC) subsidiary held with Lehman Brothers Bank has expired and was not renewed.

The collapse of the warehouse financing, a line of credit supplied by a bank to a mortgage company to fund borrowers’ property purchases, threatens Block’s sale of the unit. In April the tax-preparation company agreed to sell OOMC, a subprime mortgage lender, to Cerberus Capital Management.

Under the deal, OOMC must maintain at least $8 billion in warehouse-loan facilities, including $2 billion of unused capacity as of the closing date, according to Gimme Credit, a bond-research firm. As a result of its loss of the facility, Option One is “skirting dangerously close to the line,” the report says.

Block announced, however, that Bank of America has agreed to increase the warehouse facility available to the mortgage company from $2.002 billion to $2.252 billion. Gimme Credit says that arrangement keeps Block in compliance with the agreement.

However, the BofA deal expires when the sale closes and can’t be used until all other facilities are tapped. As a result, Gimme Credit rates Block’s credit score as “deteriorating.” Block noted in an earlier filing that Citigroup Inc.’s $1.5 billion committed line expires on July 30, according to Bloomberg.

In addition, the wire service reported that Option One has also violated minimum-income requirements in the warehouse agreements and has been getting waivers from its lenders. Some of those waivers expire at the end of this month as well.

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