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Target credit-card defaults jump
Write-offs and delinquencies are on the rise, just as Target is trying to sell half its credit-card receivables.
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A growing number of Target customers are walking away from their credit-card bills, leaving the retailer's credit-card portfolio in a riskier financial position just as the company is trying to sell half of it.
Target disclosed Tuesday that its annualized rate of chargeoffs rose to 8.12 percent in March, a significant rise from both a month ago, when the rate was 6.83 percent, and a year ago, when it stood at 6.27 percent. Target's delinquent accounts -- seen as a sign of possible future trouble -- have increased 24 percent from a year ago as a percentage of its total portfolio.
"People have lost their options to fund their debt, so they're relying on their Target cards," said Dennis Moroney, a senior analyst for bank cards at TowerGroup in Needham, Mass. "It's easy to get."
The increase in write-offs and delinquencies could reduce the price that potential buyers are willing to pay for the receivables. Target said last September that it was considering selling its credit-card portfolio. Many large retailers have done just that, typically at a premium price. Last month, Target announced it was close to a deal to sell half of its receivables -- at par value -- to an unnamed buyer. The acquirer is widely thought to be financial giant J.P. Morgan Chase & Co.
"A deterioration of this magnitude is significant and will adversely affect Target's ability to maximize the premium for its portfolio," Moroney said.
Target Chief Financial Officer Douglas Scovanner said the increase in delinquencies was largely confined to four states -- Arizona, California, Florida and Nevada -- where consumers have been particularly hard-hit by the slowing economy.
He said much of the spike was expected. Target's credit-card portfolio has grown 30 percent in the past year. Loan write-offs and delinquencies tend to spike six to nine months after the addition of more accounts, Scovanner said.
"What we're seeing now is the natural bulge in write-offs that always occurs after we've added any amount of receivables," he said. "It's part of the deal."
Charge-offs as a percentage of the portfolio will fall back to the "7 percent range" by year's end, he said. He said the company has tightened its lending standards, particularly in the four states where it is having problems.
William Ryan, an analyst at Portales Partners, a New York equity research firm that closely tracks Target's monthly credit-card financials, said Target's charge-off rate is among the highest of any credit-card issuer that he follows, and is "a sign that there's some real problems in the portfolio."
Ryan said he now expects that a buyer might walk away or demand a discount on the portfolio.
Chris Serres • 612-673-4308
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