Signet is selling the portfolio, which will have a par value of between $585m and $635m, at 72 cents on the dollar, and is expecting to book a loss of $165m-$170m including servicing costs of between $45m and $50m as well as transaction costs.
The deal is expected to close in the second quarter of 2019 and will include assets originated up to that point.
In addition, Signet has signed a five year forward flow agreement with CarVal, with the private credit firm obligated to buy non-prime credit from Signet at an agreed discount rate.
The sale and purchase agreement gives CarVal the right to securitize the credit card receivables originated under the agreement.
Signet is the largest specialty jewellery retailer in the US, the UK and Canada, operating more than 3,500 stores under brand names such as Kay Jewelers, Zales, H Samuel, Ernest Jones, and Peoples. The company reported on Wednesday that sales in the 2018 fiscal year were down $155.4m, or 2.4%, compared with 2017.
Signet slims credit risk
CarVal will hold back 5% of the purchase price at the closing of the deal, which will be paid out after two years, depending on the performance of the assets. If the assets fail to perform, Signet subsidiary Sterling will be required to pay CarVal up to 10% of the purchase price for the assets, depending on how badly the assets missed their targeted yield.
Servicing on the non-prime card deals will be carried out by Genesis, under the terms of a previous agreement.
Signet has been on a mission to shift consumer credit risk off its balance sheet, and ensure future lending is financed by third parties.
The agreement with CarVal follows a previous announcement last May that it would sell about $1bn of prime consumer loans to Alliance Data.
“The completion of the second phase outsourcing of Signet’s credit portfolio is expected to significantly reduce consumer credit risk from the balance sheet, reduce working capital and allow the company to continue to return significant capital to shareholders,” the company said in a statement.
The company plans to use the sale proceeds to fund a share buyback of about $475m during 2019.