Target Suspends Card Receivables Sale and Ends Chase Deal

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Target Corp., which has tried for years to sell its credit card assets, is giving up for now -and spending more than $2.8 billion to divorce itself from JPMorgan Chase & Co.

The Minneapolis retailer said Wednesday that it has temporarily "suspended" its efforts to sell its credit card receivables portfolio, but that it expects to resume negotiations with "a limited number of potential partners" later in the year.

Target is also unwinding its credit card business from JPMorgan Chase & Co., which in 2008 paid $3.6 billion in an unusual deal to finance 47% of Target's card receivables, while the retailer retained control of the overall operations. That deal was initially seen by some as the prelude to JPMorgan Chase's eventual takeover of the entire portfolio, but industry members said on Wednesday that it eventually limited Target's ability to negotiate with other potential buyers.

"Unwinding the Chase financing piece of it is just being done to simplify an eventual transaction," says John Costa, a managing director at the Auriemma Consulting Group.

He and others blamed Target's pullback this week on the tough M&A environment for credit cards, which has pushed down asset prices and discouraged Citigroup Inc. and other potential sellers from dumping unwanted, large portfolios. (The major exception is Capital One Financial Corp.'s deal to buy $30 billion of credit card assets from HSBC, which is sharply cutting back its U.S. operations.)

Target now appears to be betting that the economy will pick up later in 2012, pushing up the prices that buyers are willing to pay. Retailers' credit cards were seen as a particularly risky asset during the financial crisis, as losses surged, but some banks are recommitting to them.

Target's credit card portfolio is "continuing to improve and I think their conclusion is that waiting for later this year is likely to benefit the portfolio valuation," Costa says. "They could sell the portfolio right now if they wanted to. I think they're delaying this because they've got an appreciating asset."

The retailer said in November that the quarterly charge-off rate on loans deemed uncollectible plunged to 5.7%, from 10.9% a year earlier. Its loan-loss reserves fell 63.6% to $40 million from $110 million a year earlier.

"Losses are getting better for that sort of credit card receivable. But Target's business is not as robust as before the recession and so they want to maximize their return before making a portfolio flip," says credit card industry veteran Steve Kietz, an executive vice president at edo Interactive Inc.

He has a relatively rosy outlook for Target's future prospects, especially once Target untangles the credit card assets from JPMorgan Chase.

"My interpretation is that it was a combination of market conditions and the contracts that they had with Chase. They thought better of rushing the deal," Kietz says.

He points to a resurgence of interest in retailer credit card operations from large banks, including Capital One and Citigroup, which in October recommitted to that business after struggling to find a buyer for its store-card unit.

"There are players, large top five players, that are getting more aggressively into the private label [card business]," Kietz says, adding that the decision to delay its sales process "gives Target a chance to get their infrastructure ready to take on such a large partner."

There also might be less pressure within the company for a sale than a few years ago, when investors questioned why the discount-chic retailer insisted on holding onto a financial services unit that was relatively unrelated to its main business.

"Part of the driver behind this sale originally was the notion that equity investors and Target didn't necessarily want Target's balance sheet being tied up in the card business," says Auriemma's Costa.

But as the metrics on the portfolio improve, there may be "a little less pressure in that direction," he says. "Target probably has more comfort in waiting."

Additional time could also potentially bring more buyers to the table — both for Target and for other prospective sellers.

"We've heard now from several institutions that are looking to become more active as acquirers," says Costa. "I think we are going to see more activity in the card space."

Part of that has to do with banks shoring up their own financials.

"There are going to be more buyers because capital is being replenished [and] loan losses are being reduced," says Bob Hammer, founder and chief executive of card industry advisory R.K. Hammer in Thousand Oaks, CA.

He adds that some possible buyers have been tied up in other deals, but could return to the market.

"You have some bona fide buyers who have their hands full," says Hammer. "Buyers like Capital One ….They've got their hands full [finalizing the deal with HSBC] but who's to say they wouldn't be an interested party in the long run."

JPMorgan Chase had agreed to finance the Target receivables until late 2013, but in 2011 the bank gave the retailer "an option to retire this financing" that expires at the end of this month, according to the press release Wednesday. JPMorgan Chase declined to comment.

Now Target will pay JPMorgan Chase roughly $2.8 billion to retire the financing, along with a so-called "make-whole premium" which the retailer estimates will reduce fourth quarter 2011 earnings per share by 8 cents.

The make-whole premium can be thought of as a prepayment of interest expenses that the retailer would have paid to JPMorgan Chase, says Target spokesman Eric Hausman.

The retailer helped finance its payoff by issuing $2.5 billion in bonds just last week.

"We raised debt and we're paying off other debt and the figures are relatively close," Hausman says.

Target expects to make up some of that 8 cents per share through lower expected interest expenses over the next two years, according to the press release.

— Maria Aspan contributed reporting.

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