BackTarget pays uncertainty premium for CEO void
Target is paying a bond-market penalty of about $12.5 million for failing to name a permanent successor to former CEO Gregg Steinhafel
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New York: Target Corp. is paying a bond-market penalty of about $12.5 million for failing to name a permanent successor to former chief executive officer Gregg Steinhafel, who was ousted after hackers compromised shoppers’ data.
The discount retailer sold $1 billion of 2.3% five-year bonds on Tuesday that yielded 60 basis points more than similar-maturity Treasuries, compared with a 47 basis point spread indicated by Target’s existing securities on 16 June, according to data compiled by Bloomberg. Steinhafel has been replaced on an interim basis by John Mulligan, previously the chief financial officer, who has embarked on an anti-bureaucracy campaign after millions of customers were put at risk by data breaches during the holiday shopping season.
“The unsettled leadership, a decline in sales last year and a stock that’s dropped 8% in 2014, are raising the risks for lenders," according to Carol Levenson, an analyst at New York-based debt researcher Gimme Credit Llc.
“There are a lot of reasons to be wary of this credit," Levenson wrote in an e-mail. “The former CEO could be counted upon to remain financially conservative. Who knows what the financial policies might be under a new leader, especially considering the weak stock price performance?"
Extra interest
Target also paid a 90 basis point spread on $1 billion of 10-year bonds with a 3.5% coupon sold on Tuesday, compared with an 84 point premium in secondary trading before the sale. The new issues were sold to back a tender offer of as much as $1 billion to retire higher-yielding debt.
Based on spreads before the issue, Target will pay about $6.5 million of extra interest on the five-year debt and $6 million on the longer-term portion over the lives of the bonds.
Eric Hausman, a Target spokesman, said by e-mail that the company was pleased with today’s transaction. He declined to comment further on the offering.
Besides struggling to recover from the hacker attack last year that compromised the data of millions of customers and hurt sales, an unprofitable Canadian expansion has dogged the retail chain. Tony Fischer, president of Target Canada, was replaced on 20 May by Mark Schindele, after the unit lost $941 million before interest and taxes in 2013, reducing the year’s profit by $1.13 a share.
Strategic disarray
“It’s been a tough period for many mid-tier retailers, but Target seems to be in some strategic disarray," Levenson said.
Mulligan said in a 6 May interview that while he doesn’t plan to vie for a permanent CEO role, he isn’t in caretaker mode and his top priority is improving financial results.
Moody’s Investors Service said in a 5 May statement that Steinhafel’s sudden departure had a negative effect on the retailer’s credit, but it didn’t change the company’s A2 rating and stable outlook. Standard & Poor’s grades Target A, equivalent to the Moody’s ranking, and also maintains a stable outlook.
Target will use proceeds from Tuesday’s issue for general corporate purposes and to repurchase bonds from among $3.8 billion face value in six series of notes with coupons ranging from 6.35% to 7%, according to a statement on Tuesday.
7% bonds
“The retailer has been chipping away at its high cost debt on a regular basis via tender offers," Levenson said. “The bonds it’s seeking to redeem have a weighted-average coupon of 6.7%, implying the opportunity for substantial interest expense savings," she wrote in a research note.
The highest priority will be given to $1.49 billion of 7% bonds due January 2038 at a maximum price of $1.386.84 for every $1,000 of face value, including an early-tender premium, according to the statement. Those securities traded at 134 cents on the dollar to yield 4.61% on 12 June, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“The timing is a little odd because they’re struggling to show a better operating story," James Goldstein, an analyst at New York-based researcher CreditSights Inc., said in a telephone interview.
The sale on Tuesday came with spreads on investment-grade US corporate bonds at about their lowest since 2007 and yields that fell to a record 2.65% last year remaining below 3.1% since the end of April, according to the Bank of America Merrill Lynch US Corporate Index.
Attractive time
Jody Lurie, an analyst at Philadelphia-based Janney Montgomery Scott LLC, said spreads are grinding tighter and are continuing to do so, and so a lot of companies who are thinking about coming to market see it as an attractive time.
Target’s net income fell 34.3% in the year through Feb. 1 to $1.97 billion as sales dropped to $72.6 billion from $73.3 billion a year earlier. Income will rise to $2.33 billion in the current year, according to 12 analysts polled by Bloomberg, while revenue reaches $74.4 billion.
The retailer has $11.7 billion of bonds outstanding, with a weighted average coupon of 5.33% and 12.69 years to maturity.
Target stock ended on Tuesday at $58.17, down 8.1% for the year.
While the data breach eventually will fade from consumer’s memories, Goldstein said in a research report, Target will have to pay a premium for its leadership uncertainty.
“Any time a company is without a full-time CEO, you have to question the direction the company will choose in the interim," he said by telephone. “You never know what you’re going to get." Bloomberg
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