Target Corporation Announces Agreement to Sell Interest in Credit Card Receivables to JPMorgan Chase for Initial Investment of $3.6 Billion

Business Wire, May 5, 2008

MINNEAPOLIS -- 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.