Discover 2009 Annual Report Download - page 120

6. Credit Card Securitization Activities
The Company accesses the term asset securitization market through DCMT and DCENT, which are trusts into which
credit card loan receivables generated in the Direct Banking segment, formerly referred to as the U.S. Card segment, are
transferred (or, in the case of DCENT, into which beneficial interests in DCMT are transferred) and from which beneficial
interests are issued to investors. The Company continues to own and service the accounts that generate the transferred
loan receivables. The DCMT debt structure consists of Class A, triple-A rated certificates and Class B, single-A rated
certificates held by third parties. Credit enhancement is provided by the subordinated Class B certificates, a cash
collateral account, and beginning July 2009, a more subordinated Series 2009-CE certificate that is retained by the
Company. DCENT consists of four classes of securities (Class A, B, C and D), with the most senior class generally
receiving a triple-A rating. In this structure, in order to issue senior, higher rated classes of notes, it is necessary to obtain
the appropriate amount of credit enhancement, generally through the issuance of junior, lower rated or more highly
subordinated classes of notes. In addition, there is another series of certificates (Series 2009-SD) issued by DCMT which
provides increased excess spread levels to all other outstanding securities of DCMT and DCENT. DCMT and DCENT are
not subsidiaries of the Company and, as such, are excluded from the consolidated financial statements in accordance
with GAAP. The Company’s securitization activities generally qualify as sales under GAAP which applied in the periods
presented in the accompanying consolidated financial statements and, accordingly, are not treated as secured financing
transactions. As such, credit card loan receivables equal to the amount of the investors’ interests in transferred loan
receivables are removed from the consolidated statements of financial condition. However, as described in Note 1:
Background and Basis of Presentation, pursuant to Statements No. 166 and 167, the transferred loan receivables will be
consolidated in the Company’s financial statements effective December 1, 2009.
In the first half of 2009, substantially all of the securities issued by the trusts were placed on negative ratings watch by
the rating agencies. To address these ratings watches, in July 2009, DCMT and DCENT issued two new subordinated
classes of securities, Series 2009-CE certificates and Class D notes, respectively. The issuance of Series 2009-CE
certificates from DCMT provides credit enhancement to all outstanding series of DCMT other than Series 2007-CC which
supports the DCENT notes. The issuance of Class D notes from DCENT provides enhancement to the more senior
outstanding Class A, B and C notes of DCENT. In addition to these actions, in September 2009, DCMT also issued Series
2009-SD certificates to increase the levels of excess spread for all outstanding issuances of DCMT and DCENT. Series
2009-SD certificates make their principal collections available for reallocation to all other outstanding series of DCMT
and DCENT on an as-needed basis to cover shortfalls in interest and servicing fees and to reimburse charge-offs. The
outstanding amounts of these three newer classes of subordinated securities are expected to fluctuate as the related
outstanding series of DCMT mature and with the maturity and new issuances of more senior DCENT notes. Similar to all
prior issuances by the trusts, these new securities are certificated. However, they are not rated, were acquired by a
wholly-owned subsidiary of Discover Bank and are recorded at amortized cost as held-to-maturity investment securities
on the consolidated statements of financial condition. The Company was not contractually required to provide this
incremental level of credit enhancement but was permitted to do so pursuant to the transaction documents governing
DCMT and DCENT.
Also during 2009, the trusts began allocating merchant discount and interchange revenue to certain series issued by
DCMT that prior to July 2009 did not receive an allocation of this revenue, resulting in all outstanding series of DCMT
and DCENT receiving an allocation of merchant discount and interchange revenue beginning July 31, 2009.
The Company’s retained interests in credit card asset securitizations include an undivided seller’s interest, certain
subordinated tranches of notes and certificates, accrued interest receivable on securitized credit card loan receivables,
cash collateral accounts, servicing rights, the interest-only strip receivable and other retained interests. The Company’s
undivided seller’s interest, which generally ranks pari passu with investors’ interests in the securitization trusts, is not
represented by a security certificate and accordingly, is reported in loan receivables. The remaining retained interests in
credit card asset securitizations are subordinate to certain investors’ interests and, as such, may not be realized by the
Company if needed to absorb deficiencies in cash flows that are allocated to the investors of the trusts. Retained interests
classified as available-for-sale investment securities are carried at amounts that approximate fair value, with changes in
the fair value estimates recorded in other comprehensive income, net of tax. Retained interests classified as
held-to-maturity investment securities are carried at amortized cost. All other retained interests in credit card asset
securitizations are recorded in amounts due from asset securitization at amounts that approximate fair value. Changes in
the fair value estimates of these other subordinated retained interests are recorded in securitization income. For more
information on the fair value calculations of these retained interests, see Note 24: Fair Value Disclosures.
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