JP Morgan Chase Agrees to Buy Interest in Target Receivables

With so much going on in the financial markets because of the continuing debacle in the mortgage industry and with collateralized debt obligations you would think that financial institutions would be holding their money but JP Morgan Chase stepped out in a major way over the weekend as it is Target announced an interest agreement between the retail giant and the venerable financial institution as Target has agreed to sell almost 50% of its receivable portfolio to JP Morgan for over $3.9 billion.

Since the fall of 2007, senior management at Target, the nation's second biggest retailer has had the credit card portfolio on the market and the time seemed ripe for it and JP Morgan Chase to come together and work out the deal they did this weekend. The nuts and bolts of the deal are rather simple. Both JP Morgan Chase and Target have agreed to pro rata responsibility in terms of sharing profits and losses based on the equity stake held by both firms. In the case of losses, Target Financial Services and its credit card portfolio will never be brought to Target Corp. for break-evens. Target Financial Services retains its current strategy and operations guise and that will remain unless and until its current profit goals falter to the point that JP Morgan Chase's senior management start to get concerned.

While it's rather easy to see what JP Morgan Chase gets out the deal, it is more difficult to ascertain how Target benefits from the transaction. What Target states in its press release is that it allows for liquidity without using the capital debt markets where it was sure not to get the type of deal it received with its partnership with JP Morgan Chase. If the question is why Target needs liquidity, the answer may be found in its overall corporate strategy where it is looking to invest significantly in renovating existing stores, upgrading internally and developing new revenue streams to match its biggest competitor Wal-Mart.

With over $7 billion currently in receivables with its Target Financial Services issued credit card through Target National Bank, JP Morgan Chase's investment represents 47% of the outstanding receivables for Target. It is no secret how solid JP Morgan Chase is at running credit card operations and you can look for future management decisions at Target National Bank to look and feel a lot like Chase Bank operations as the retailer refocuses itself on what it does best, quality products at reasonable prices.

For investors, very little about the transaction should cause concern. The deal hinges on Moody maintaining its ratings of the existing credit card financial transactions of AAA and Aaa. And with that, Target will maintain its policy of keeping its credit card portfolio on its consolidated financial summary as a long-term debt obligation. As such, there should be little change in the earnings estimates that Target has rendered for the next year based on this particular transaction. Target fully expects to move forward with less exposure and more capital at its disposal.