Discover 2015 Annual Report Download - page 49

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by the beginning of 2018, could negatively impact the pricing and/or volume of our asset-backed securities issuances.
A prolonged inability to securitize our credit card receivables, or an increase in the costs of such issuances, may have a
material adverse effect on our liquidity, cost of funds and overall financial condition.
The occurrence of events that result in the early amortization of our existing credit card securitization transactions or
an inability to delay the accumulation of principal collections in our credit card securitization trusts would materially
adversely affect our liquidity.
Our liquidity would be materially adversely affected by the occurrence of events that could result in the early
amortization of our existing credit card securitization transactions. Our credit card securitizations are structured as
“revolving transactions” that do not distribute to securitization investors their share of monthly principal payments
received on the underlying receivables during the revolving period, and instead use those principal payments to fund
the purchase of new receivables. The occurrence of an “early amortization event” may result in termination of the
revolving periods of our securitization transactions, which would require us to repay the affected outstanding
securitized borrowings out of principal collections without regard to the original payment schedule. 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 6: 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
Discover Bank or 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. 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