Discover 2014 Annual Report Download - page 47

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securitized borrowings out of principal collections without regard to the original payment schedule. Our average level
of credit card securitized borrowings from third parties was $15.1 billion and $14.3 billion for the years ended
December 31, 2014 and 2013, respectively. Early amortization events include, for example, insufficient cash flows in
the securitized pool of receivables to meet contractual requirements (i.e. excess spread less than zero) and certain
breaches of representations, warranties or covenants in the agreements relating to the securitization. For more
information on excess spread, see Note 5: Credit Card and Student Loan Securitization Activities to our consolidated
financial statements. An early amortization event would negatively impact our liquidity, and require us to rely on
alternative funding sources, which may or may not be available at the time. An early amortization event also could
impact our ability to access the undrawn conduit facilities that we maintain for contingent liquidity purposes.
Our credit card securitization structure includes a requirement that we accumulate principal collections into a
restricted account in the amount of scheduled maturities on a pro rata basis over the 12 months prior to a security's
maturity date. We have the option under our credit card securitization documents to shorten this accumulation period,
subject to the satisfaction of certain conditions, including reaffirmation from each of the rating agencies of the security's
required rating. Historically, we have exercised this option to shorten the accumulation period to one month prior to
maturity. If we were to determine that the payment rate on the underlying receivables would not support a one-month
accumulation period, or if one or more of the rating agencies were to require an accumulation period of longer than
one month, we would need to begin accumulating principal cash flows earlier than we have historically. A lengthening
of the accumulation period would negatively impact our liquidity, requiring management to implement mitigating
measures. During periods of significant maturity levels, absent management actions, the lengthening of the
accumulation period could materially adversely affect our financial condition.
A downgrade in the credit ratings of our securities could materially adversely affect our business and financial
condition.
We, along with Discover Bank, are regularly evaluated by the ratings agencies, and their ratings for our long-
term debt and other securities, including asset-backed securities issued by our securitization trusts, are based on a
number of factors that may change from time to time, including our financial strength as well as factors that may not be
within our control. Factors that affect our unsecured credit ratings include, but are not limited to, the macroeconomic
environment in which we operate and the credit ratings of the U.S. government, the credit quality and performance of
our assets, the amount and quality of our capital, the level and stability of our earnings, and the structure and amount
of our liquidity. In addition to these factors, the ratings of our asset-backed securities are also based on the quality of
the underlying receivables and the credit enhancement structure of the trusts. Downgrades in our ratings or those of our
trusts could materially adversely affect our cost of funds, access to capital and funding, and overall financial condition.
There can be no assurance that we will be able to maintain our current credit ratings or that our credit ratings will not
be lowered or withdrawn.
We may not be successful in managing the investments in our liquidity investment portfolio 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 investment portfolio, which is comprised
of cash and cash equivalents and high-quality liquid investments. Our liquidity portfolio was $10.8 billion at
December 31, 2014. The value of our investments may be adversely affected by market fluctuations including changes
in interest rates, prices, prepayment rates, 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. In addition, economic
conditions may cause certain of the obligors, counterparties and underlying collateral on our investments to incur losses
of their own or default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other
reasons, 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. These risks could also restrict our
access to funding. While the securities in our investment portfolio are currently limited to obligations of high-quality
sovereign and government-sponsored issuers, we may choose to expand the range our investments over time, which
may result in greater fluctuations in market value. While we expect these investments to be readily convertible into cash
and do not believe they present a material increase to our risk profile or will have a material impact on our risk-based
capital ratios, they are subject to certain market fluctuations that may reduce the ability to fully convert them into cash.