Target Corporation (NYSE:TGT) today announced an agreement under which
JPMorgan Chase would invest in Target’s credit
card receivables. At closing Target would sell an undivided interest in
its credit card receivables to JPMorgan Chase (NYSE: JPM) for cash
proceeds of approximately $3.6 billion. This interest would represent
approximately 47 percent of the principal amount of Target’s
outstanding receivables at that time. This transaction is expected to
close before the end of May.
“This unique agreement accomplishes the goals
set forth in the review of receivables ownership that we initiated on
September 12, 2007,” said Doug Scovanner, EVP
and Chief Financial Officer of Target Corporation. “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. Most
importantly, this innovative transaction marks the beginning of a
long-term credit card relationship between Target and JPMorgan Chase,
which we believe will create substantial financial and strategic rewards
for both of us over time.”
This transaction is expected to provide Target with sufficient 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. Additionally, this
transaction was expressly designed to have no impact on Target’s
guests and the Target team members who provide financial products and
services to them.
Transaction Structure and Economics
Under the terms of the agreement, Target and JPMorgan Chase have agreed
to share the expected profits from this arrangement pro rata to their
respective ownership interests, subject to a cap. To the extent that the
cash-basis portfolio yield continues to exceed the cap, profits from the
entire portfolio in excess of the cap will be retained by Target. The
cap is initially 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 as a result of accretion from
an agreed-upon initial purchase discount of 7 percent of the gross
amount of principal receivables sold. Unless extended by mutual
agreement, repayment of JPMorgan Chase’s
invested capital is scheduled to begin on the fifth anniversary of the
transaction closing. Subject to portfolio performance, repayment is
expected to be completed by the sixth anniversary of closing.
The actual payments received by each party over time 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
Corporation. However, unlike its other receivables-backed financings,
Target is transferring all layers of risk in this transaction and is not
retaining a subordinated interest. As such, Target and JPMorgan Chase
would each bear a pro rata share of net portfolio losses, if any were to
occur in the future.
At Target’s option, JPMorgan Chase has agreed
to fund approximately 47 percent of Target’s
expected receivables growth in the near term, subject to an aggregate
limit of $3.9 billion of JPMorgan Chase’s
capital invested in Target’s receivables. In
the unexpected event of a decrease in receivables, Target and JPMorgan
Chase would receive pro rata payments of principal such that JPMorgan
Chase’s ownership interest would not rise
above approximately 47 percent.
Target will continue to control all aspects of creating and implementing
its financial services strategy, provided that future portfolio
performance remains sufficiently strong. Alternatively, in the event
that substantial unanticipated portfolio deterioration were to occur in
the future, JPMorgan Chase would gain certain rights to direct Target’s
credit card team to implement alternative underwriting and risk
management practices, until portfolio performance improved. For
reference, Target’s 2008 performance outlook
envisions cash-basis portfolio yields more than 500 basis points above
the level at which these rights would be triggered.
Standard & Poor’s and Moody’s
have rated one or both of Target’s
outstanding receivables-backed financings AAA and Aaa, respectively. The
closing of this transaction is conditioned upon both agencies reaching
the conclusion that the transaction would not adversely impact these
existing ratings.
Accounting for the Transaction
Accounting for this transaction will be consistent with Target’s
current accounting treatment of its outstanding receivables-backed
financings. As a result, all of Target’s
credit card portfolio will remain on its consolidated financial
statements, even in light of the occurrence of this sale and the related
transfer of risks of ownership. The alternative of structuring this
transaction as an off-balance sheet arrangement under FAS140 was
rejected after careful consideration of the uncertainty created by the
current review of FAS140 by the Financial Accounting Standards Board, as
well as the inherent complexity of its application.
The initial purchase discount of 7 percent approximates Target’s
current allowance for doubtful accounts as a percentage of accounts
receivable. Consistent with the accounting treatment of Target’s
existing accounts receivable securitization transactions,
portfolio-related income and expense will remain on Target’s
consolidated financial statements and the financing will be reflected on
Target’s Consolidated Statement of Financial
Position as non-recourse, long-term debt. No gain or loss will be
recorded at closing, and the aggregate costs of this financing are
expected to exceed Target’s variable-rate
unsecured borrowing costs by an annualized after-tax amount that
approximates 3 to 4 cents per share, or approximately 1 percent of Target’s
projected 2008 earnings per share.
2008 Full-Year Outlook for Target’s Credit
Card Portfolio
Expectations for full year 2008 growth in both accounts receivable and
credit card profits remain consistent with prior guidance. Specifically,
in the near term we expect substantial year-over-year receivables growth
as a result of the sequential growth that occurred in the second and
third quarters of 2007. In contrast, sequential quarterly receivables
growth in 2008 is expected to reflect typical seasonality in conjunction
with annual underlying growth consistent with likely growth in Target’s
retail sales. For the year, Target continues to expect that the
beneficial impact on profits from average receivables growth will exceed
the adverse impact from the expected decline in portfolio yield.
Additionally, for the full year, the beneficial impact from recent terms
changes are expected to fully offset the adverse impact of slightly
poorer-than-expected credit card losses. Specifically, we now expect net
write-offs as a percentage of receivables to lie in the range of 7 to 8
percent for the year, and we continue to expect that delinquencies as a
percentage of receivables will remain stable at approximately 4 percent.
Conclusion
“We are excited to enter into this agreement
with JPMorgan Chase, whose vast financial services experience and proven
track record of innovation have produced superior credit card results
over time,” said Gregg Steinhafel, Chief
Executive Officer of Target Corporation. “We
expect that the unique relationship we have forged with this agreement
will benefit both companies and their shareholders over time.”
“Chase is pleased to partner with Target, one
of the world’s best brands,”
said Gordon Smith, CEO of Chase Card Services. “We
believe this relationship will be quite successful over time for both
organizations.”
Financial Reporting Matters
Concurrent with the appointment of Gregg Steinhafel as Chief Executive
Officer of Target Corporation on May 1st, the
company engaged in a re-evaluation of its reportable business segments.
As a result, beginning with its first quarter 2008 reporting, Target
will begin reporting two segments: Retail and Credit.
In addition, during the first quarter, the company reviewed its
Consolidated Statements of Operations cost classification policy,
primarily related to distribution and other supply chain costs that were
previously classified within Selling, General & Administrative Expenses
(SG&A). The review was prompted by changes within Target’s
supply chain processes and infrastructure, primarily related to the
operation of its own food distribution network. As a result of this
review, the company has changed the classification of distribution costs
from SG&A to cost of sales.
Neither of these reporting changes affects Target Corporation’s
consolidated results. Previously presented consolidated results will be
reclassified to conform to the current year presentation with respect to
both of these changes, and Target intends to furnish this information on
its website (www.target.com/investors)
prior to the release of its first quarter earnings results on May 20,
2008.
Miscellaneous
Target Corporation will webcast a conference call at 9:00am CDT on May
6, 2008, in which Doug Scovanner and Terry Scully, President of Target
Financial Services, will answer questions pertaining to this release.
Investors and the media are invited to listen to the call through the
company’s website at www.target.com/investors
(click on “webcasts”).
A telephone replay of the call will be available beginning at
approximately 11:30am CDT on May 6, 2008, through the end of business on
May 8, 2008. The replay number is (800) 642-1687 (passcode: 46486049).
This release contains forward-looking statements, including statements
relating to future receivables portfolio performance, unsecured
borrowing costs, and closing of the transaction, which should be read in
conjunction with the cautionary statements in Exhibit (99)A to the
company’s 2007 Form 10-K.
Target Corporation’s operations include
large, general merchandise and food discount stores and a fully
integrated online business through which it offers a fun and convenient
shopping experience with thousands of highly differentiated and
affordably priced items. The company currently operates 1,613 Target
stores in 47 states. Target Corporation news releases are available at www.target.com.
JPMorgan Chase & Co. (NYSE: JPM) is a leading global financial services
firm with assets of $1.6 trillion and operations in more than 60
countries. The firm is a leader in investment banking, financial
services for consumers, small business and commercial banking, financial
transaction processing, asset management, and private equity. A
component of the Dow Jones Industrial Average, JPMorgan Chase serves
millions of consumers in the United States and many of the worlds most
prominent corporate, institutional and government clients under its
JPMorgan and Chase brands. Information about the firm is available at www.jpmorganchase.com.
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