H&R Block Credit-Default Swaps Surge as Claims Increase

The cost to protect H&R Block Inc. debt from losses surged after the tax services company reported preliminary profit and revenue that trailed analysts’ estimates, with a jump in claims for so-called putbacks of loans.

Credit-default swaps on the Kansas City, Missouri-based company jumped 68 basis points to 508 basis points at 4:08 p.m. in New York, according to broker Phoenix Partners Group. The contracts jumped the most since May 2010, according to prices compiled by Bloomberg.

The swaps surged after the biggest U.S. tax preparer reported yesterday that diluted earnings per share from continuing operations for the fiscal year ending April 30 may be $1.15 at most, compared with the average estimate of $1.42 from eight analysts surveyed by Bloomberg. The company’s Option One Mortgage Corp., now known as Sand Canyon Corp., “received new claims for alleged breaches of representations and warranties in the principal amount of $543 million,” since the fiscal third quarter ended Jan. 31, the company said in a filing.

These claims were up from $35 million last quarter and compared with the cumulative $826 million before this quarter, according to a research note by Hale Holden and Danish Agboatwala, debt analysts at Barclays Plc in New York.

The swaps, which typically rise as investor confidence deteriorates, had eased from a high of 598 basis points in December as the market perceived declining risk of put-backs worsening. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Subprime Mortgage Securities

This week, H&R Block agreed to pay more than $28 million to resolve regulatory claims that a subsidiary improperly sold investors subprime mortgage-backed securities without disclosing risks. Sand Canyon promised investors in more than $4 billion of residential mortgage-backed securities it sponsored in early 2007 that it would repurchase or replace mortgages that breached representations and warranties, the Securities and Exchange Commission said in a statement on April 24. As its financial condition worsened, the firm didn’t tell investors it could not repurchase the investments on its own.

Gene King, a spokesman for Kansas City-based H&R Block, said in an e-mail that the company doesn’t comment on litigation.

Consumer Sentiment

A gauge of U.S. corporate credit risk fell for the third day. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 1.4 basis points to a mid-price of 96.2 basis points, Bloomberg prices show.

The credit swaps index climbed earlier in the day as an index of executive and consumer sentiment fell to 92.8 this month from a revised 94.5 in March, according to the European Commission in Brussels. The measure was less than the median of 94.2 forecast by 29 economists surveyed by Bloomberg News, raising concerns of a deepening slump in the euro region.

The U.S. two-year interest-rate swap spread, a measure of stress in debt markets, increased 1.32 basis point to 30.31 basis points. The measure widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

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