Capital Markets

JPMorgan Finds Receivables in Target’s Aisle

Retailer will sell 47 percent of them to the bank for $3.6B in a novel arrangement.
Stephen TaubMay 6, 2008

Target Corp. said it will sell 47 percent of its receivables to JPMorgan Chase for $3.6 billion in a deal it heralds as the beginning of a long-term credit card relationship between Target and JPMorgan Chase.

The discount retailing giant said the transaction — larger than some observers expected it to be — will provide liquidity to implement its business plans, including previously announced capital investment and share repurchase activity, without the need to access term debt capital markets again this year.

“This unique agreement accomplishes the goals set forth in the review of receivables ownership that we initiated on Sept. 12, 2007,” Target EVP and CFO Doug Scovanner said. “It provides significant liquidity to Target from a single source unrelated to debt capital markets, provides an appropriate sharing of the portfolio benefits and risks between Target and JPMorgan Chase, and allows our guests to continue to benefit from the creativity and expertise of the world-class team at Target Financial Services.” Scovanner said the long-term relationship ” will create substantial financial and strategic rewards for both of us over time.”

Under its terms, Target and JPMorgan Chase agreed to share the expected profits based on their respective ownership interests, subject to a cap. Profits from the entire portfolio in excess of the cap will be retained by Target.

The cap initially is set at an annualized yield of approximately 3.4 percent of the principal amount of JPMorgan Chase’s interest in the receivables, and will vary over time, with changes in one-month LIBOR. JPMorgan Chase will earn an additional return over the initial five-year term of the transaction based on certain conditions.

Actual payments received by each party will be solely determined by, and funded from, the performance of Target’s credit card portfolio. Similar to its other outstanding receivables-backed financings, this financing is non-recourse to Target.

Interestingly, JPMorgan Chase’s invested capital will be repaid beginning in the fifth year and full repayment is expected to be completed by the sixth year, making the deal sound more like a loan to Target.

In addition, Target will retain control all aspects of implementing its financial services strategy, provided that future portfolio performance remains sufficiently strong.

Target noted that Standard & Poor’s and Moody’s have rated one or both of its outstanding receivables-backed financings AAA and Aaa, respectively.

The company has been under some pressure to sell its credit-card operation, with investor William Ackman’s Pershing Square Capital Management hedge fund leading the charge. Last September, Target said it would “review ownership alternatives” for the unit.

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