Loans sold, partnership renewed, lawsuit dropped: Synchrony’s win-win-win

Synchrony Financial no longer has to live with the threat of being sued by one of the world’s largest retailers.

The Stamford, Conn., credit card issuer said Wednesday that it had reached an agreement to sell its portfolio of Walmart credit card loans to Capital One Financial and has extended its exclusive partnership with Sam’s Club. It also said that, as a condition of the loan sale, Walmart has agreed to drop an $800 million lawsuit it brought against Synchrony last year over the fate of that portfolio.

“We’ve been able to renew Sam’s, resolve where the Walmart book is going and not have the lawsuit hanging over our head. The overall result is really great for the company,” President and CEO Margaret Keane said Wednesday on the company’s fourth-quarter earnings call. “We feel good and we’re very happy about where we landed with the agreement with Walmart and Sam’s Club.”

The announcement that Walmart was dropping the suit was welcome news to Synchrony investors who had seen the value of their shares drop 21% since Walmart said in July that it was shifting its card business from Synchrony to Capital One. Synchrony’s shares were up nearly 10% in midday trading Wednesday, to $29.17.

Warren Kornfeld, an analyst at Moody’s Investors Service, said that the renewal of the Sam’s Club contract — which had been in doubt given that Sam’s Club is a unit of Walmart — is also a big win for Synchrony.

The mass-affluent, cobranded credit card market can be extremely competitive, but Synchrony had pretty much secured its position as a leader in the less competitive mass market, he said. The conflict with Walmart raised questions about whether Synchrony might lose its traction there.

“They have renewed most of their large relationships, but the biggest overhang was Sam’s Club,” Kornfeld said.

The drama for Synchrony began in July, when Walmart announced a deal to make Capital One the exclusive issuer of its credit cards starting in August 2019. Walmart and Synchrony then began negotiating over the sale of approximately $10 billion in loan balances that accounted for about 13% of Synchrony’s total loan receivables.

But it was the sale price of that portfolio that appeared to be the sticking point for all parties. Capital One’s contract with Walmart did not require the bank to buy the portfolio of older loans, though it had the option to buy those loans at a valuation determined by a process laid out in the contract.

In November, the Bentonville, Ark.-based retailer sued Synchrony for $800 million in damages, claiming the credit card issuer had breached its contract with Walmart. In a lawsuit filed in federal court in Arkansas, Walmart claimed Synchrony had underwritten the portfolio in a way that put an unreasonably high valuation on those loans, which are likely to have higher-than-normal losses.

If Capital One decided it didn’t want to pay the price that Synchrony was asking for the book, then Walmart might have needed to make up the difference, hence the retailer’s stake in the sale.

The conflict also appeared to imperil Synchrony’s contract with Sam’s Club, which was set to expire in 2021.

Kornfeld called the agreement a credit positive for both Capital One and Synchrony. The loss-sharing agreement appeared to be “very generous” for Capital One, he said, and the revenue-sharing agreement also promises to be profitable.

Capital One's credit losses will be fixed a low percentage rate through the duration of the partnership with Walmart. Additionally, Capital One's share of the revenue will increase after one year.

Capital One expects to incur about $225 million of expenses to create a new originations process for the portfolio and to integrate the portfolio. Capital One also expects to hire new personnel to handle the integration and management of the Walmart portfolio.

Neither company disclosed the price paid for the portfolio of cobranded and private-label card receivables, though Capital One Chairman and CEO Richard Fairbank described the price and terms as “attractive.”

Capital One also plans to help Walmart reach more high-income customers through digital sales, Fairbank said during the company’s earnings call on Tuesday night.

"Right now the Walmart portfolio is one [that's] got high credit losses," he said. "We and Walmart have aspirations to build a pretty different business. The first word I would put out there is the word digital. If you look actually at Walmart's customer base, there's a lot of upmarket people there and a lot of opportunity. The key is to turn that opportunity into real digital buying power."

Synchrony executives provided few details about the agreement with Sam’s Club, except to say that it was a “multi-year extension” of an existing partnership that dates to the mid-1990s.

With the sale of the Walmart portfolio now in place, Synchrony expects to free up about $500 million in capital for share repurchases and other business investments in the first quarter as it releases loss reserves against the Walmart portfolio. Executives said they expect to release an additional $200 million to $250 million in capital in the second and third quarters.

The sale of loan portfolio is expected to close in the second half of this year.