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Whither Jackson Hewitt?

Adam Rust's picture

Posted November 18, 2010

Tax preparation firm Jackson Hewitt has until Saturday to meet the terms of its line of credit agreement with Wells Fargo.

Wells Fargo stipulated that JTX needed to have full funding for its refund anticipation loan (RALs) offerings for the upcoming tax season.  Currently, Jackson Hewitt has funding lined up with Republic Bank of Kentucky (RBCAA). Republic said that it expects to impose new underwriting criteria. That could mean that fewer consumers will be able to get a RAL in the first place.

The mystery in all of this is Wells. The event of default is a condition that gives Wells the ability to pull

back their line of credit. It doesn't require Wells to do that, though. This is the big question.

Jackson Hewitt shares have, until yesterday, shown no sensitivity to the deadline. The shares were trading for $1 on October 1st. They closed as high as $1.17 on October 5th, and as low as 94 cents on October 21st.

It is tricky to put a price on a company in this situation. In the event of default, Jackson Hewitt shares are just about worthless.  If Wells holds off, then they remain in their current torpor, stuck at a $1 or so.

Pricing then becomes a case of creating a net present value.  The price of the shares becomes a factor of the percentage chance that Wells calls in their credit line. If a call is a 50 percent chance, then the shares should price at 50 cents.

The lack of movement seemed to suggest that Wells had sent out some kind of signal that they would not consider Jackson Hewitt to be in default, even if they hadn't secured their RAL money. Perhaps it meant that Wells didn't want to own a struggling tax prep chain, much like the way that bankers put off on foreclosing on a delinquent mortgage because they aren't interested in owning another Fort Myers duplex.The shares were still fluctuating within the neighborhood of $1.

Then things changed on Wednesday. In unusually high volume, Jackson Hewitt shares dropped as low as 76 cents per share.  It is as if the odds suddenly changed, and the new normal was factoring in a 25 percent chance that Wells would call their credit.

Stay tuned.