TD Bank Group's purchase of Target Corp.'s credit-card portfolio may portend more such sales by retailers, while also providing a blueprint for how to structure those deals.
TD announced Tuesday that it will buy the Minneapolis-based chain's portfolio for the gross value of the outstanding receivables when the sale closes. Currently, the receivables are valued at roughly $5.9 billion, Target says.
In addition, the Canadian bank agreed to underwrite, fund and own future Target credit card and Target Visa receivables in the United States under a seven-year agreement. TD will handle the risk management and compliance for the accounts, while Target will handle account servicing. The companies will share the profits generated.
Before the deal was announced, Target said that it was in talks with several potential buyers, suggesting that large banks are increasingly interested in purchasing retail credit card portfolios. Virtually all of the major credit-card issuing banks are potential buyers, according to John Costa, a managing director at Auriemma Consulting.
"To the extent other retailers are looking to shed credit card portfolios, there's a ready audience to acquire those," he said.
Indeed, the market for card portfolios has shown strong improvement this year — by the start of August, 36 credit card portfolios had changed hands, compared to 10 for all of 2011, according to RK Hammer Associates.
Capital One Financial (COF), Citigroup (NYSE: C), and General Electric are among the other financial companies that have been acquiring retail card portfolios.
The TD-Target deal is notable because the assets were not sold at a premium, but instead purchased at par, with the profit-sharing agreement being used to bridge the gap. That structure is a way to work around concerns of issuing banks about the treatment of credit card premiums under Basel III capital rules, Costa said.
"That's an unusual arrangement. We'll probably see more of it," he said.
Target, which has tried to sell its card assets for years, took its portfolio off the market in January, while saying that it expected to resume negotiations later in the year.
At the time the retail giant was seeking to extricate itself from a 2008 deal with JPMorgan Chase & Co., which may have limited its ability to negotiate with other potential buyers.
Under the deal with TD Bank, Target will have the "more substantial interest" in future credit card receivables, and it will cover most of the operating costs, the companies said in a press release.
"This transaction achieves all of Target's strategic and financial goals for a portfolio sale," Gregg Steinhafel, chairman, president and chief executive officer of Target, said in a press release. "We look forward to working with this premier global financial institution to continue Target's long history of innovation in our guest-focused financial services strategy."
For TD, which is awash in deposits and late last year bought the $8.6 billion credit card portfolio of MBNA Canada from Bank of America, the deal provides a platform to expand its North American credit card business.
"We think Target will be a great partner. We're looking forward to growing the business," said Michael Rhodes, the executive vice president of North American credit cards at TD. "And we think this is a great springboard to help us take advantage of the opportunities in the marketplace."
TD also said that the purchase will contribute to meeting next year's stated adjusted earnings target of $1.6 billion from its U.S segment.
Target said its third-quarter earnings will reflect a pre-tax gain of roughly $150 million due to a change of the accounting treatment of the receivables, it said. When the deal closes, Target expects a pre-tax gain of $350 million to $450 million.
The companies expect to close the sale in the first half of 2013.