GE Consumer Finance is poised to become a much larger player in the credit card sector, as it pockets the receivables of two U.S. retailers and stakes out more business overseas, following last week's announced plans to gobble up the credit card arm of Dillard's Inc., the sixth-largest in-house card program in the U.S., for about $1.25 billion. This amount includes $400 million of securitization.

GE Consumer Finance also agreed last week to buy Moscow-based DeltaBank, the largest Visa credit card issuer in Russia with 103,000 cardholders. Although terms weren't disclosed, one published report put the purchase price at a "relatively modest" $100 million, while another reported it at $120 million.

And one week earlier, GE Consumer Finance agreed to pay $475 million for the retail credit card receivables of Mervyn's, a subsidiary of Target Corp. A proposed partnership calls for helping Mervyn's increase the use of its card among customers.

Analysts expect the aggressive buying by GE to continue. And some market observers speculate that it could result in more term credit card deals, as the company moves away from relying solely on asset-backed commercial paper. Company executives did not return calls seeking comment.

Only One Deal So Far

GE Consumer Finance, a subsidiary of GE Capital Corp., is described as the largest issuer of commercial paper in the world in a March 18 report from Standard & Poor's. Although GE Consumer Finance is a major player in private-label credit cards, GE Capital issued its first term deal in that asset class in June, but greater volume could be in the works.

GE Capital has begun diversifying its funding, and it significantly reduced the total size of its commercial paper program during the past two years. Total CP to debt declined to 26% at year-end 2003, from 48% at year-end 2001, according to the S&P report.

Analysts said GE Capital generally funded credit card receivables through its Edison Funding conduit, a multiseller asset-backed commercial paper program rated A1+' by S&P and P-1' by Moody's Investors Service. As of Nov. 30, the most recent measure available from Moody's, the program had $21.7 billion outstanding, of which 17% came from consumer credit cards, according to Moody's. But GE Capital is interested in the term market.

The company set up a master note trust last year and plans to be a programmatic issuer going forward. Credit Suisse First Boston and JPMorgan Securities led the inaugural $952.5 million deal, which priced June 15. All three tranches of the deal, called GE Capital Credit Card Master Note Trust 2004-1, came in at or below price talk, with the three-year triple-A senior notes pricing at five basis points over one-month Libor.

While Dillard's 3.9-year series 2002-1 transaction priced to yield 40 basis points over interpolated swaps, tightening was not reported, as sources said the original buyers were likely buy-and-hold insurance companies. They would more likely "clip the coupon," and continue collecting the added yield and enjoy the security of the triple-A rated financial behemoth as servicer. Dillard's unsecured debt, meanwhile, is rated double-B minus by Fitch Ratings, B2' by Moody's and double-B by S&P.

Familiar Names

Dillard's and Mervyn's aren't new names to ABS investors either, although neither has been in the market in the past two years. The Dillard Credit Card Master Trust issued a $258 million deal in June 2000 via the then-Chase Securities and

a $200 million deal

in September 2002 through Morgan Stanley.

Target Credit Card Master Trust has issued two $1 billion deals in 2001 and 2002, each via Lehman Brothers. Mervyn's contributed 24% of the receivables to the August 2001 deal and 15% of the receivables to the June 2002 deal.

Tom Foley, a credit analyst at S&P who follows GE Capital, viewed the two latest U.S. additions favorably. "The company is continuing to build out its private-label credit card portfolio, so that's a positive," he said.

Foley also said the Consumer Finance unit is likely to continue making frequent acquisitions, given its mandate to grow assets and earnings at least 15% annually. "As with other divisions of GE Capital Corp., they have some relatively aggressive growth targets for the overall portfolio, which would require a certain amount of acquisition in addition to organic growth," he said.

Joining the Trend

Dillard's and Mervyn's represent the latest example of a larger trend in the credit card sector. Richard Drason, a Fitch research director covering credit card ABS, said smaller issuers in the retail sector have been exiting for the past year: Saks Fifth Avenue sold to Household Finance, Sears Acceptance Corp. to Citibank, N.A. and Circuit City to Bank One, N.A., now JPMorgan Chase.

Drason views the trend as a positive one, since established private-label issuers tend to be more sophisticated with underwriting and risk management than the retailers. Another plus is that a more diverse portfolio can withstand retailer-specific problems more easily.

"Any acquisition by a big name - either a big-money center bank or a diversified finance company like GE - brings in the economies of scale they have to run the business more efficiently and more profitably," Drason said.

"From a servicing standpoint, from a marketing standpoint, from an underwriting standpoint, it could be better to investors in the long run," he added.

Drason also said he expects the consolidation trend to continue, fueled by competitive scale considerations, corporate restructurings and bankruptcies, but declined to list any potential sellers.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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