Target Corporation (NYSE:TGT) is facing mounting pressure from investors to improve returns, but it could come at the expense of bond investors. William Ackman’s Pershing Square disclosed that it now holds a 10 percent stake in the discount retailer and hinted that it may take action to unlock value for shareholders. The likelihood that these actions could weigh on Target’s balance sheet spooked many credit investors who believe that this is the wrong course of action.

Many credit investors insist that Target is best off cutting costs and preserving its cash in the face of increased economic uncertainty and earnings misses. This pragmatic approach would preserve the company’s liquidity and integrity while slowly turning it around. William Ackman, however, is working against the clock with large option positions and will likely push for more aggressive financial policies in order to boost the share price in the short term.

Pershing Square has already pressured Target to sell off its credit card assets, but this sale is no longer likely given the financial firms that would be potential buyers are struggling themselves. Meanwhile, the company has already instituted a $10 billion share buyback program that caused Fitch to cut its credit rating. Many now believe that the activist may be interested in leveraging the balance sheet in order to obtain cash for an increased share buyback or special dividend.

Pershing Square’s investment in Target is already deep under water – down nearly 50% thanks to Target’s weak stock performance. Ackman assured his investors that the stock is significantly undervalued, saying the stock could go to $120 in three years if the company completes the stock buyback, sells the credit card unit and explores a potential real estate transaction. Combined, these factors make TGT a stock worth watching!

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