Target Corp.'s Proposed Senior Unsecured Notes Rated 'A'; Issuance To Bolster Liquidity Amid Pandemic Pressures

NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings today assigned its 'A' issue-level rating to big-box discounter Target Corp.'s proposed senior unsecured notes that we expect could be up to about $2 billion. We anticipate the transaction to be leverage neutral as the company supplements liquidity given the volatile macroeconomic environment.
Unlike most retailers, Target has experienced gains due to a coronavirus-related surge in sales. The company is seeing top-line volumes climb, with month-to-date March same-store sales up 20%, including essentials and food and beverage same-store sales up 50% versus last year. We expect these results to continue this year since the company is deemed an "essential" retailer that will likely stay open in the U.S. through the pandemic. Target cited $300 million in costs above previous full-year guidance given the COVID-19 spread in the U.S. associated with labor hours, supply chain, and merchandise volume expenses. Sales declines in higher-margin discretionary categories have also offset positive results in other areas.
The rating and outlook are unchanged and this transaction bolsters what we view as already-strong liquidity. The company is prudently suspending share buybacks, reducing store remodels (to 130 stores in 2020 from 300 originally planned), and launching 15-20 instead of 36 small-format stores this year. Its nearest-term debt maturity is $1 billion in January 2022, and it ended the fiscal year with an unfunded $2.5 billion revolver and $2 billion in excess cash. With no outstanding commercial paper balances, pro forma for the transaction, we expect Target's S&P Global Ratings-adjusted debt leverage to remain below mid-2x, which is our current downside rating trigger.

Issue Ratings--Subordination Risk Analysis

Capital structure
Target's capital structure consists of short- and long-dated unsecured notes and a committed $2.5 billion revolver that expires in October 2023. No balances were outstanding on the revolver at any time during 2019 or currently.
Substantially all outstanding borrowings are senior unsecured obligations. Target also obtains short-term financing from time to time under its commercial paper program, which is a form of notes payable.
Analytical conclusions

We rate the proposed unsecured notes 'A', the same level as our long-term issuer credit rating, because there are no subordination risks or material priority obligations ranking ahead of this debt.
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