Wells Fargo Stands by Jackson Hewitt

Wells Fargo extended its line of credit to Jackson Hewitt on Friday.

In an 8-K released after the close of trading, Jackson Hewitt announced that Wells agreed to renew their commitment to the tax preparation franchise. The new loan includes a few interesting provisions:

• At any time, Wells can demand that Jackson Hewitt repay $25 million at any time between April 4th and July 15th, 2011. This would suggest that Wells has taken a wait-and-see posture about the upcoming tax season. Deliver or be kicked to the curb.
• The agreement puts caps on how much Jackson Hewitt can spend this month and during January 2011.
• The agreement puts restrictions on payouts to senior JTX executives.
• Jackson Hewitt has to pay a “waiver fee” to Wells of $482,000. In the world of corporate finance, that sounds like a small prepayment penalty. For Jackson Hewitt, not quite – JTX only had $4.1 million in cash on hand at the end of October.

This is one more bit of good news for Jackson Hewitt in just a few weeks. That market is happy about it, too. Their shares have doubled since November. But here’s the thing about this amendment: even though it is a fresh lease on life, it is an awfully short leash. It is almost funny. Wells is telling Jackson Hewitt what they can do with their cash now (don’t spend more than $17 million), to whom they can give their cash (not to their senior executives), and exactly when it has to come back. Wells wants two payments in the next five months of $55 million.

Oh, one more thing in that 8-K:

Jackson Hewitt said that it has reached a RAL funding agreement with Republic (not news) that will last through the 2015 tax season (news). Republic says it will provide RALs and RACs to 4,200 Jackson Hewitt locations. This begs the next question – does Jackson Hewitt even need the Santa Barbara TPG/University Bank RAC funding any more?

The banks have all of the advantages. Republic was able to negotiate a provision that allows the bank to terminate the relationship if RAL delinquencies are too high. If Republic exits, then Jackson Hewitt is further obligated to compensate the bank.

Wells Fargo inherited its position in this arrangement when it purchased Wachovia.  But even if Wells cannot be characterized as the iniatior of this affair, they have proven that they are in it for the long haul. If you feel some hesitancy about the impact of refund anticipation loans, then you have to place some of the blame for the availability of these loans at their feet. Their line of credit is essentially collateralized by refund anticipation loans. Indeed, the ongoing extension of credit was contingent upon RAL funding. Moreover, Wells’ patience with Jackson Hewitt has come at a time when most tax preparers can no longer offer RALs. Liberty does have the loans, but at this point Block remains uncertain about their status with HSBC. Many of the independents had been working with Chase.