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Toys R Us card issuer may offer 'useful' credit alternatives to holders

The going-out-of-business sales reportedly set to begin as early as March 22 at the U.S. locations of Toys R Us Inc. may bring opportunities for consumers to hunt for bargains, but for the issuer of the retailer's co-branded and private-label cards, the liquidation carries a range of risks.

"The risk of loss to Synchrony is substantially greater in [going-out-of-business] sales than in sales made in the ordinary course of business because the likelihood of repayment is lower and the chances of chargebacks are higher," attorneys for Synchrony Financial's Synchrony Bank said in a March 19 court filing. Chargebacks occur when a customer asks the bank to reverse a charge.

Attorneys warned in the filing, which Synchrony submitted as a limited objection to a Toys R Us motion to liquidate, that consumers would continue to make chargebacks and other claims long after the sales conclude. If Toys R Us is out of business and unable to reimburse Synchrony for returns and chargebacks, they alleged, the bank "will effectively end up funding the ... liquidation."

Toys R Us inserted language in its liquidation motion that Synchrony had proposed to address those concerns, including clauses prohibiting Toys R Us from soliciting new card accounts and giving Synchrony discretion to finance transactions that occur as part of the store closing process.

The bank noted that it is not required to allow cards to be used in connection with going-out-of-business sales, particularly to the extent that such action results only in claims against the bankruptcy estate not likely to be paid. The amended language in the motion gives the bank permission to continue to set off and recoup processing fees, returns, chargebacks and other adjustments in the ordinary course.

Additionally, the revised motion allows Synchrony to "offer its cardholder customers the opportunity to use cards at other merchants." The program agreement between Synchrony and Toys R Us includes a loss-mitigation mechanism that allows the bank to sell accounts related to the retailer's cards to the extent that the number of its permanent brick-and-mortar outlets falls below 250. Bankruptcy court documents listed 735 remaining retail locations. Alternatively, the agreement allows Synchrony the ability to "convert any or all accounts to another credit or charge program maintained by [the] bank or any of its affiliates."

That option, the bank said in the court filing, can help it preserve some of the value of its relationships with the affected cardholders while providing those consumers with a "useful" credit product.

"If cardholders accept those offers, then that could substantially diminish the damages that Synchrony will otherwise incur as a consequence of the Debtors' liquidation," Synchrony said.

The bank did not quantify the size of its Toys R Us-related portfolio or the number of cardholders affected, but the retailer does not rank among its largest partners. Synchrony's most recent Form 10-K stated that relationships with Gap Inc.; J.C. Penney Co. Inc.; Lowe's Cos. Inc.; and Walmart Inc., including a separate agreement with Sam's Club, collectively accounted for 53% of its total interest and fees on loans in 2017.

Issuers active in the private-label and co-brand card businesses, such as Synchrony, have regularly faced questions about the implications of the challenging financial outlooks for a number of brick-and-mortar retailers. In November 2017, for example, Synchrony CFO Brian Doubles emphasized that the vast majority of Synchrony's exposure in the event of a retailer's bankruptcy is to the consumer as opposed to the debtor.

"If it's a liquidation, we get out and communicate with the consumer" that they remain obligated to pay their debt, he said. "We always liquidate profitably," he added. "There's enough yield coming off the book to support the credit cost."

Issuing replacement products to cardholders can help Synchrony offset the loss of a partnership from a growth perspective. Synchrony officials mentioned the bankruptcy of electronics retailer hhgregg Inc. as a factor in a lagging rate of expansion in purchase volume during the fourth quarter of 2017 versus previous quarters.

Published reports indicated that certain hhgregg cardholders received the Synchrony HOME card, which can be used at numerous national and regional furniture, electronics and other home-focused retailers.

The court filing did not specify which new or existing Synchrony products would be candidates to replace the Toys R Us-branded cards. Synchrony offers a Walmart credit card and private-label cards in partnership with Amazon.com Inc., and those products would seem to represent viable alternatives for consumers of toys.

The replacement strategy has "been very successful in the past," Doubles said in November 2017. "We would certainly roll that out in the event of a retailer bankruptcy."