On active trading last week, spreads for Sears Roebuck & Co. credit card ABS tightened 10 to 20 basis points on the news that its operations would be purchased by Citigroup. Boosting momentum was the news that, in addition to the portfolio sale, Sears had successfully established a strategic alliance with Citi, which the market saw as creating competitive synergies for the largest credit card issuer in the U.S.

Sears Credit Account Master Trust 2002-4, with roughly two years of tenor remaining, tightened to a reported eight basis points over one-month Libor, from pre-announcement levels in the 20 to 22 basis point area. The bonds moved from a slight discount to a premium, tightening through the 13 basis point coupon over Libor. Analysts expect the deals to eventually move in line with Citibank ABS, the richest in the credit card arena. Citi's ABS remained unchanged on the news.

As part of the $32 billion acquisition, Sears is expected to book a $6 billion gain, a $3 billion premium on the portfolio, lower than the 20% premium Sears initially hoped for. Additionally, as per the strategic alliance, Sears expects roughly $200 million a year in annual performance payments from Citi, as well as a cost savings of another $200 million. The agreement is for 10 years.

The benefits to Citi are numerous as well, executives claimed on the post-announcement conference call. Citi plans to take advantage of Sears' 2700 points of distribution to leverage portfolio growth and help it expand into the underserved Latino borrower base. Citi also hopes to cross-market various other consumer loan products, such as home equity loans to current Sears credit card holders - something Sears has not had the ability to do since the mid-1980s.

Citi seemingly cherry-picked accounts from the trust, acquiring all but $600 million in delinquent accounts. As a result, the rising delinquencies and losses that had sparked the negative headlines are seen stabilizing over the next two years, with losses peaking over the next year.


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