Discover 2010 Annual Report Download - page 161

27. Subsequent Events
Acquisition of The Student Loan Corporation. The Company completed the acquisition of The Student Loan Corporation
(“SLC”) on December 31, 2010. Discover Bank, a wholly-owned subsidiary of the Company, acquired SLC for aggregate
consideration of $600 million (the “Aggregate Merger Consideration”), in a merger transaction, with SLC surviving the
merger as a wholly-owned subsidiary of Discover Bank, in accordance with the Agreement and Plan of Merger entered
into between Discover Bank and SLC on September 17, 2010 (the “Merger Agreement”). Discover Bank received a
purchase price closing adjustment in the form of a cash payment of approximately $234 million by Citibank, N.A.
(“Citibank”), the 80% owner of SLC before the merger, resulting in a net cash outlay by Discover Bank of approximately
$366 million for the acquisition of SLC.
As a result of the merger, Discover Bank acquired: (i) the beneficial interests in securitization trusts formed for the
purpose of holding the private student loans associated with a public securitization transaction issued out of the SLC
Private Student Loan Trust 2006-A, and a private securitization transaction issued out of the SLC Private Student Loan
Trusts 2010-A and 2010-B (collectively, the “Loans”), (ii) the cash reserves held in the securitization trusts associated with
the Loans and (iii) certain fixed, tangible and intangible assets including, without limitation, SLC’s student loan origination
business. The total assets Discover Bank acquired had a book value of approximately $4.2 billion as of November 30,
2010. Discover Bank also assumed securitization debt and other liabilities of approximately $3.4 billion. Discover Bank
acquired the Loans and other assets at an 8.5% discount, which will be applied to balance sheet items through purchase
accounting entries.
In connection with the closing of the merger, Discover Bank consented to the commutation of certain insurance policies
covering certain of the Loans, and entered into amendments of the Indemnification Agreement with Citibank and the
Purchase Price Adjustment Agreement with Citibank and SLC that were entered into concurrently with the Merger
Agreement, as further described below.
Under the terms of the Purchase Price Adjustment Agreement, Citibank paid Discover Bank approximately $234
million, which is the amount by which the Aggregate Merger Consideration ($600 million) exceeded the closing purchase
price of the securitization trust certificates (approximately $439 million), plus the absolute value of all reimbursable
liabilities (approximately $57 million), plus an amount equal to a portion of the commutation payment made in
connection with the commutation of certain insurance policies covering certain of the Loans (approximately $16 million).
The provision for the commutation payment was added to the Purchase Price Adjustment Agreement by amendment. The
commutation is further described below.
Under the terms of the original Indemnification Agreement, Citibank agreed to indemnify Discover Bank for liabilities
and losses arising from and relating to (i) SLC’s asset sales to Sallie Mae and Citibank, (ii) failure of the issuers of the
insurance policies covering the Loans to perform their obligations, and (iii) certain other events. Under the terms of the
amendment to the Indemnification Agreement, Citibank agreed to indemnify Discover Bank for liabilities and losses
arising from and relating to the commutation of certain insurance policies covering the Loans, as further described below.
In connection with the closing of the merger, Discover consented to the commutation of three of SLC’s student loan
insurance policies with United Guaranty Commercial Insurance Company of North Carolina (“United Guaranty”)
covering certain of the Loans. Accordingly, SLC and United Guaranty entered into a Commutation Agreement and
Release whereby United Guaranty agreed to make a lump sum payment to SLC in consideration of the termination of
United Guaranty’s obligations under the commuted policies. None of the commuted policies covers any of the Loans
associated with the public securitization transaction issued out of the SLC Private Student Loan Trust 2006-A. In
connection with the foregoing, Discover and Citi agreed to amend the Indemnification Agreement, and Discover, Citi and
SLC agreed to amend the Purchase Price Adjustment Agreement.
Long-term Borrowings. On December 15, 2010, DCENT, one of the Company’s securitization trusts, issued $500
million of asset-backed securities through its private conduit providers. Related to this issuance, $69.8 million of
subordinated interests were issued and retained by a wholly-owned subsidiary of the Company.
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