MOODY'S CONFIRMS Aaa AND PRIME-1 RATINGS OF CERTIFICATES ISSUED BY DISCOVER CARD MASTER TRUST I; SUBORDINATE RATINGS REMAIN UNDER REVIEW FOR POSSIBLE DOWNGRADE
Approximately $23 Billion of Asset-Backed Securities Affected
New York, July 22, 2005 -- Moody's Investors Service has confirmed the ratings on twenty classes
of the senior Class A securities issued through Discover Card Master Trust
I (the Trust) as well as the Prime-1-rated certificates
issued out of the Newcastle Certificate Program. The twenty classes
of the subordinate Class B securities remain under review for possible
downgrade. These securities were placed under review for possible
downgrade on April 13, 2005.
Moody's actions today follow the July 20, 2005, downgrade
of Discover Bank's (Discover) deposit rating to A3 from Aa3,
bank financial strength rating to C- from C, and short-term
rating to Prime-2 from Prime-1. Discover Bank's
long-term ratings (except for the financial strength rating) remain
under review for possible further downgrade. The ultimate outcome
of the continuing rating review is dependent upon Morgan Stanley's
final decision on whether to proceed with a spin-off of Discover.
This action reflects Moody's opinion that Discover is now less of
a strategic asset for Morgan Stanley than prior to the announcement of
the spin-off. If the spin-off occurs as planned,
then Moody's expects to assign a Baa2 long-term deposit rating
and Baa3 senior unsecured rating to Discover Bank, with a stable
outlook.
Moody's ratings on the asset-backed securities (ABS) are
closely related to those of Discover Bank due to the risks associated
with the Discover Card proprietary payments network and the reliance on
a unique structural feature of the Trust that was a key factor in setting
credit enhancement levels. The Discover Card network allows merchants
to accept Discover Card transactions and, because it is an independent
network, its viability is inextricably linked to the credit strength
of Discover Bank. Likewise, the efficacy of the fixed finance
charge allocation feature in the Trust is dependent upon the viability
of the underlying card program.
In Moody's view, though the three-notch downgrade of
Discover Bank's deposit rating to A3 increases the likelihood that
there could be a partial or full shutdown of purchases on the Discover
Card network, this increased risk is not enough to warrant a downgrade
on any of the outstanding ABS certificates. This rating confirmation
is contingent on maintenance of Discover's current deposit rating.
If the spin-off occurs, as stated earlier, Moody's
expects to assign a Baa2 long-term deposit rating and Baa3 senior
unsecured rating to Discover Bank, with a stable outlook.
In this case, the probability of a full or partial shutdown of purchases
on the Discover network is higher than in the non-spin-off
case, which increases the risk to bondholders. This increased
risk is not sufficient to result in a downgrade of the current Aaa or
Prime-1 ratings on the ABS bonds, but the current ratings
will be more volatile than newly issued credit card securities.
In addition, in the event of a spin-off, the subordinate
Class B securities would likely be downgraded to A3 from A2 unless compensating
actions are taken by Discover.
Furthermore, if Discover Bank is spun off, the required credit
enhancement for newly issued senior and subordinate bonds would likely
increase in order to achieve respective Aaa and A2 ratings.
In its analysis, Moody's assumed that Discover will continue
to maintain the seller's interest in the Trust at well above the
contractually required minimum of 7%. Since 2001,
the Trust's seller's interest has ranged from 10.3%
to 24.8%. Though not typically considered incremental
credit enhancement, in certain scenarios, the additional seller's
interest provides some benefit to the overall enhancement levels.
For example, a larger seller's interest is of incremental
value if it is assumed that card utility has been closed and the securitized
portfolio is declining.
The performance of the securitized Discover Card portfolio remains within
the bounds of Moody's expectations and is not a principal factor
in the ratings review. The long-term average yield has remained
slightly below the industry average as measured by Moody's Credit
Card Index. The chargeoff rate and payment rate have trended above
the industry average.
The complete rating action is as follows:
The following ratings were confirmed:
Issuer: Discover Card Master Trust I
$4,000,000,000 Newcastle Certificate Program,
Series 2000-A, rated Prime-1
$600,000,000 6.05% Class A Certificates,
Series 1996-3, rated Aaa
$1,000,000,000 Floating Rate Class A Certificates,
Series 1996-4, rated Aaa
$671,980,000 Floating Rate Class A Certificates,
Series 1998-5, rated Aaa
$650,000,000 Floating Rate Class A Certificates,
Series 2000-4, rated Aaa
$850,000,000 Floating Rate Class A Certificates,
Series 2000-7, rated Aaa
$500,000,000 6.35% Class A Certificates,
Series 2000-9, rated Aaa
$1,200,000,000 Floating Rate Class A Certificates,
Series 2001-1, rated Aaa
$1,100,000,000 Floating Rate Class A Certificates,
Series 2001-2, rated Aaa
$750,000,000 Floating Rate Class A Certificates,
Series 2001-3, rated Aaa
$500,000,000 5.75% Class A Certificates,
Series 2001-6, rated Aaa
$750,000,000 5.15% Class A Certificates,
Series 2002-2, rated Aaa
$900,000,000 Floating Rate Class A Certificates,
Series 2002-3, rated Aaa
$750,000,000 Floating Rate Class A Certificates,
Series 2002-4, rated Aaa
$500,000,000 Floating Rate Class A Certificates,
Subseries 1, Series 2003-1, rated Aaa
$500,000,000 Floating Rate Class A Certificates,
Subseries 2, Series 2003-1, rated Aaa
$500,000,000 Floating Rate Class A Certificates,
Subseries 3, Series 2003-1, rated Aaa
$1,000,000,000 Floating Rate Class A Certificates,
Series 2003-2, rated Aaa
$900,000,000 Floating Rate Class A Certificates,
Series 2003-3, rated Aaa
$1,100,000,000 Floating Rate Class A Certificates,
Subseries 1, Series 2003-4, rated Aaa
$750,000,000 Floating Rate Class A Certificates,
Subseries 2, Series 2003-4, rated Aaa
$1,250,000,000 Floating Rate Class A Certificates,
Series 2004-1, rated Aaa
$1,250,000,000 Floating Rate Class A Certificates,
Subseries 1, Series 2004-2, rated Aaa
$500,000,000 Floating Rate Class A Certificates,
Subseries 2, Series 2004-2, rated Aaa
$1,500,000,000 Floating Rate Class A Certificates,
Series 2005-1, rated Aaa
The following ratings remain under review for possible downgrade:
$31,579,000 6.25% Class B Certificates,
Series 1996-3, rated A2
$52,632,000 Floating Rate Class B Certificates,
Series 1996-4, rated A2
$35,368,000 Floating Rate Class B Certificates,
Series 1998-5, rated A2
$34,211,000 Floating Rate Class B Certificates,
Series 2000-4, rated A2
$44,737,000 Floating Rate Class B Certificates,
Series 2000-7, rated A2
$26,316,000 Floating Rate Class B Certificates,
Series 2000-9, rated A2
$63,158,000 Floating Rate Class B Certificates,
Series 2001-1, rated A2
$57,895,000 Floating Rate Class B Certificates,
Series 2001-2 rated A2
$39,474,000 Floating Rate Class B Certificates,
Series 2001-3, rated A2
$26,316,000 Floating Rate Class B Certificates,
Series 2001-6, rated A2
$39,474,000 5.45% Class B Certificates,
Series 2002-2, rated A2
$47,369,000 Floating Rate Class B Certificates,
Series 2002-3, rated A2
$39,474,000 Floating Rate Class B Certificates,
Series 2002-4, rated A2
$26,316,000 Floating Rate Class B Certificates,
Subseries 1, Series 2003-1, rated A2
$26,316,000 3.45% Class B Certificates,
Subseries 2, Series 2003-1, rated A2
$26,316,000 Floating Rate Class B Certificates,
Subseries 3, Series 2003-1, rated A2
$52,632,000 3.85% Class B Certificates,
Series 2003-2, rated A2
$47,369,000 Floating Rate Class B Certificates,
Series 2003-3, rated A2
$57,895,000 Floating Rate Class B Certificates,
Subseries 1, Series 2003-4, rated A2
$39,474,000 Floating Rate Class B Certificates,
Subseries 2, Series 2003-4, rated A2
$65,790,000 Floating Rate Class B Certificates,
Series 2004-1, rated A2
$65,790,000 Floating Rate Class B Certificates,
Subseries 1, Series 2004-2, rated A2
$26,316,000 Floating Rate Class B Certificates,
Subseries 2, Series 2004-2, rated A2
$78,948,000 Floating Rate Class B Certificates,
Series 2005-1, rated A2
BACKGROUND
Discover Bank, the originator and servicer of the Discover card
receivables, is a Delaware-chartered, FDIC-insured
bank and an indirect subsidiary of Morgan Stanley. Discover Bank
has a long-term deposit rating of A3, a short-term
deposit rating of Prime-2, which are under review for possible
downgrade, and a bank financial strength rating of C- (not
under review). Moody's rates Morgan Stanley's long-term
debt Aa3 (negative outlook) and rates its commercial paper Prime-1.
New York
Jay Eisbruck
Managing Director
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
William Black
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653