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Rating Action:

Moody's confirms ratings of Discover Card Master Trust I credit card receivables-backed securities

07 Aug 2009

Approximately $10.7 billion of asset-backed securities affected

New York, August 07, 2009 -- Moody's Investors Service has confirmed the ratings of 26 classes of asset-backed securities issued out of the Discover Card Master Trust I ("DCMT" or "Trust"). These securities are backed by $38 billion of consumer credit card receivables originated and serviced by Discover Bank ("Discover"), a subsidiary of Discover Financial Services.

The rating action today concludes the review of the indicated securities issued from the Trust initiated on June 2, 2009 when Moody's placed these ratings under review for possible downgrade, and follows Discover's issuance of the Series 2009-CE Subordinate Certificates, to provide additional credit enhancement to all the outstanding securities issued out of DCMT.

RATIONALE

In order to address the deterioration in some of the Trust's key performance metrics, on July 24, 2009, Discover issued a subordinated Series 2009-CE certificate, adding 6.5% in subordination (expressed as a percentage of the total invested amount including Series 2009-CE) for the benefit of all classes of currently outstanding DCMT securities. In addition to the cash collateral account sized at approximately 7.0% of the total invested amount, the Class A and B certificates now have a total of 11.2% and 6.5% of subordination, up from 5.0% and 0.0%, respectively.

In addition, according to an 8-K filed on June 17, 2009, Discover is expected to issue an additional sub-series of certificates, Series 2009-SD, in September of this year. This series, issued out of DCMT will make its principal collections available to all other outstanding securities in both DCMT and Discover Card Execution Note Trust ("DCENT"). For DCENT notes, all diverted principal collections will directly bolster yield, and for the DCMT certificates, these re-allocated cash flows will be available on an "as needed basis" to bolster excess spread. Through this mechanism, we estimate that the potential lift to excess spread will be 4%. Furthermore, the issuance of the subordinated Series 2009-SD, sized at 2% of the aggregate invested amount of both DCENT and DCMT, will provide additional, albeit temporary, credit enhancement to all outstanding securities. Series 2009-SD is expected to mature in December 2011.

The complete rating actions are as follows:

RATINGS CONFIRMED

Issuer: Discover Card Master Note Trust I:

$1,000,000,000 1996-4 Class A, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$52,632,000 1996-4 Class B, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$900,000,000 2003-3 Class A, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$47,369,000 2003-3 Class B, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$750,000,000 2003-4 Sub. A-2, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$39,474,000 2003-4 Sub. B-2, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$700,000,000 2005-4 Sub. 1A, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$36,843,000 2005-4 Sub. 1B, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$800,000,000 2005-4 Sub. 2A, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$42,106,000 2005-4 Sub. 2B, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$750,000,000 2006-1 Sub. A-2, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$39,474,000 2006-1 Sub. B-2, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$600,000,000 2006-2 Sub. A-2, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$31,579,000 2006-2 Sub. B-2, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$320,000,000 2006-2 Sub. A-3, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$16,843,000 2006-2 Sub. B-3, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$500,000,000 2006-3 Class A, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$26,316,000 2006-3 Class B, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$1,500,000,000 2007-1 Class A, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$78,948,000 2007-1 Class B, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$750,000,000 2007-2 Class A, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$39,474,000 2007-2 Class B, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$1,100,000,000 2007-3 Class A Sub. 1, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$57,895,000 2007-3 Class B Sub. 1, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

$500,000,000 2007-3 Class A Sub. 2, Floating Rate Asset-backed Notes, Confirmed at Aaa; previously placed under review for possible downgrade on June 2, 2009

$26,316,000 2007-3 Class B Sub. 2, Floating Rate Asset-backed Notes, Confirmed at A2; previously placed under review for possible downgrade on June 2, 2009

COLLATERAL PERFORMANCE

The consumer-led economic downturn has adversely affected Discover's Trust collateral performance, albeit to a lesser extent than many others in the industry. This distinction in performance is attributable to the Trust's well-seasoned portfolio comprised of mostly-prime credit card receivables. In addition, the Trust has lower- than-average exposure to California and Florida, where consumers have been particularly hard hit by home price depreciation in this current economic downturn.

Our performance expectation for the Trust's gross charge-off rate is 9%-11%, principal payment rate is 14.5%-17.5% and yield is 18%-21%.

At the end of July, Discover amended the three outstanding "pre-2004" deals, issued out of the DCMT, which did not include interchange as a component of yield, unlike all other outstanding Discover securities. Therefore, as of the July servicer report, yield for DCMT Series 1996-4, Series 2003-3 and Series 2003-4 will now include interchange, bringing yield for these three series into parity with the yield reported for all other outstanding DCMT series. We are therefore revising our expected yield range for these three series to 18.0% - 21.0% (from 15.5% - 18.5%) - the same expected range we currently have on all other Discover sponsored credit card ABS transactions.

These performance expectations indicate our forward-looking view of the likely range of performance over the medium term. From time to time, we may, if warranted, change these expectations. Performance that falls outside a given range may indicate that the collateral's credit quality is stronger or weaker than anticipated when the related securities were rated. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions. The decision to take (or not take) a rating action is dependent on an assessment of a range of factors including, but not exclusively, the performance metrics.

ABS LINKAGE TO DISCOVER BANK

On June 1, Moody's downgraded Discover's deposit rating to Baa3 from Baa2, reflecting our view that the likelihood of a partial or full shutdown of purchases on the Discover Card network is incrementally higher than that viewed previously (though still quite low). Our ratings on the asset-backed securities issued out of the Trust are closely related to the rating of Discover in several respects.

The Discover Card network, which allows merchants to accept Discover Card transactions, is a proprietary system. Therefore, its viability is inextricably linked to the credit strength of Discover.

Secondly, investors in securities issued out of the Trusts benefit from a unique structural feature—the fixed finance charge allocation. The efficacy of the fixed finance charge allocation feature is primarily dependent upon the viability of the underlying card program and the amount of seller's interest. In a scenario in which credit lines are shut down and cardholders can no longer make purchases on the Discover Card, the fixed finance charge allocation would provide little, if any, incremental benefit.

METHODOLOGY

The principal methodology used in rating the transaction was "Moody's Approach To Rating Credit Card Receivables-Backed Securities", which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issue can also be found in the Credit Policy & Methodologies directory.

BACKGROUND

Discover Financial Services, a newly formed bank holding company, is a leading credit card issuer and electronic payment services company. The company reported total managed receivables of $50.9 billion as of 5/31/09.

On June 1, Moody's Investors Service downgraded the senior unsecured ratings of Discover Financial Services to Ba1 from Baa3 and its principal operating subsidiary Discover Bank, to Baa3 from Baa2. The rating outlook for both institutions remains negative. The Bank Financial Strength Ratings of Discover Bank was lowered to D+ from C- and the Prime-2 short-term rating for Discover Bank was reduced to Prime-3. Discover Bank is the originator and servicer of the Trust.

For more information please visit www.Moodys.com

New York
William Black
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Rebeca Sanchez Sarmiento
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's confirms ratings of Discover Card Master Trust I credit card receivables-backed securities
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