What’s Target Really Up To?

Its plan to review credit-card alternatives may reflect interest in a securitization, rather than an outright sale of the business.

Target Corp.’s description of a plan to “review ownership alternatives” for its $7 billion of credit-card receivables seems more likely to result in a securitization than the sale of the assets to a bank, as other retailers have done.

The Minneapolis-based retailer said on Wednesday that it had engaged Goldman Sachs to advise it in a study of credit-card assets that will run through the end of December. The work “will be focused on the economics of possible alternatives and will include, but not be limited to, an examination of possible differences in growth rates and credit risk exposure between the current direct ownership model and other possible ownership structures, the cost of debt and equity capital to fund our receivables, and current and future liquidity considerations.”

Target’s credit-card review was widely interpreted as a response to pressure from activist William Ackman, of Pershing Square Capital, for Target to find ways to boost its stock price. Short-term, the Target plan did just that, as Bloomberg News reported that shares rose $1.92, or 3 percent, to $64.64 by mid-afternoon on Thursday. The news service identified Ackman as controlling 9.6 percent of Target, the nation’s largest discounter after Wal-Mart.

Many observers also saw Target as suggesting that it might be considering a sell-off of its entire credit-card business, as Sears and Macy’s have done before it. (Each selected Citigroup as the purchaser.) Elements of the Target announcement, however, point to such a dramatic approach being less likely for Target than either a securitization or a one-time sale of receivables that allows it to retain the credit-card business itself. Target’s release referred several times to selling “receivables,” rather than the credit-care business unit. A sale of receivables is often the first step in a securitization, giving the seller an upfront infusion of cash while transferring rights to future payments to investors in the form of asset-backed commercial paper or other securities. Under that scenario, Target would continue to own its credit-card business and also likely would continue to collect and service the receivables.

If Target is indeed considering a securitization, the cautious, exploratory approach it is taking in doing so could be a further indication of the decline in investor appetite for asset-backed commercial paper. A year ago the disposal of Target’s receivables, while a large issuance requiring due diligence, would have posed little problem. The volatile market today, however, could offer a test of investors’ willingness to digest such an offering.

Target spokesman John Hulbert told CFO.com that the company’s plan to study alternatives did not reflect the current volatile credit-market situation or other outside factors. Asked whether securitization was an option being considered, he said that “there are many possible structures in which we would no longer have the receivables on our balance sheet. We want to make sure that whatever is done with those receivables is consistent with our brand.”

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