Discover 2009 Annual Report Download - page 41

negative outlook to Baa3 with negative outlook, which remains at investment grade level. Failure to maintain an
investment grade long-term debt rating could materially adversely affect the cost of funds, access to capital and funding,
and overall financial condition of Discover Bank. There can be no assurance that Discover Bank will be able to maintain
its current credit ratings or that its credit ratings will not be lowered or withdrawn in their entirety.
The credit ratings of the securities issued by our securitization trusts are regularly evaluated by the rating agencies. The
ratings of our asset-backed securities are based on a number of factors, including the quality of the underlying
receivables and the credit enhancement structure of the trusts. One rating agency has indicated that it will adjust its
methodology to give greater consideration to the effect the financial strength of Discover Bank, as originator of the credit
card receivables and master servicer of the securitization trusts, may have on the performance of the underlying credit
card asset-backed securities when determining the credit rating of the trust securities, which could negatively impact the
ratings of our asset-backed securities. The rating agencies may require us to take certain credit enhancement actions to
maintain the ratings of the securities issued out of our trusts, which we may not be able to complete. TALF currently
requires a triple-A or equivalent rating from at least two nationally recognized rating agencies for an issuance to qualify
as eligible collateral. Failure to maintain the credit ratings of our asset-backed securities could prevent us from issuing
new securities from our securitization trusts that are eligible securities under TALF or otherwise, which may have a
material adverse effect on our liquidity, cost of funds and overall financial condition.
We may not be successful in managing the investments in our liquidity reserve and investment performance may
deteriorate due to market fluctuations, which would adversely affect our business and financial condition.
We must effectively manage the risks of the investments in our liquidity reserve. Investments in our liquidity reserve may
be adversely affected by market fluctuations including changes in interest rates, prices, credit risk premiums and overall
market liquidity. Also, investments backed by collateral could be adversely impacted by changes in the value of the
underlying collateral. Certain markets have been experiencing disruptions in market liquidity, and the lack of a secondary
market may adversely affect the valuation of certain of our investments. In addition, deteriorating economic conditions
may cause certain of the obligors, counterparties and underlying collateral on our investments to incur losses of their own,
thereby increasing our credit risk exposure to these investments. These risks could result in a decrease in the value of our
investments, which could negatively impact our financial condition. For example, for the years ended November 30,
2009 and 2008, we recorded losses of $8.2 million and $49.1 million, respectively, on an investment in certain asset-
backed commercial paper notes purchased in a prior period.
Changes in the level of interest rates could materially adversely affect our earnings.
Changes in interest rates cause our interest expense to increase or decrease, as certain of our debt instruments carry
interest rates that fluctuate with market benchmarks. If we are unable to pass any higher cost of funds to our customers,
the increase in interest expense could materially reduce earnings. Some of our consumer loan receivables bear interest at
a fixed rate or do not earn interest, and we may not be able to increase the rate on those loans to mitigate any higher
cost of funds. At the same time, our variable rate receivables, which are based on the prime market benchmark rate, may
not change at the same rate as our floating rate borrowings or may be subject to a cap, subjecting us to basis point risk.
The majority of our floating rate borrowings are asset securitizations, which are generally based on the 1-month LIBOR
rate. For example, if the prime rate were to decrease without a decrease in the 1-month LIBOR rate, our earnings would
be negatively impacted. In addition to asset securitizations, we also utilize deposits as a significant source of funds.
Although our interest costs associated with existing deposits are fixed, new deposit issuances are subject to fluctuations in
interest rates.
Interest rates may also adversely impact our delinquency and charge-off rates. Many consumer lending products bear
interest rates that fluctuate with certain base lending rates published in the market, such as the prime rate and LIBOR. As
a result, higher interest rates often lead to higher payment requirements by consumers under obligations to us and other
lenders, which may reduce their ability to remain current on their obligations to us and thereby lead to loan delinquencies
and additions to our loan loss provision, which could materially adversely affect our earnings.
We have a credit facility that could restrict our operations.
We have a multi-year unsecured committed credit facility that currently has $2.4 billion available and contains
restrictions, covenants and events of default. See “Management’s Discussion and Analysis of Financial Condition and
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