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