Discover 2015 Annual Report Download - page 90

-74-
Credit Card Securitization Financing
We use the securitization of credit card receivables as a source of funding. We access the asset-backed
securitization market using the Discover Card Master Trust I ("DCMT") and the Discover Card Execution Note Trust
("DCENT"), through which we issue DCENT DiscoverSeries notes both publicly and through private transactions. We
retain significant exposure to the performance of trust assets through holdings of the seller's interest and subordinated
security classes of DCENT.
The securitization structures include certain features designed to protect investors. The primary feature relates to
the availability and adequacy of cash flows in the securitized pool of receivables to meet contractual requirements, the
insufficiency of which triggers early repayment of the securities. We refer to this as "economic early amortization,"
which is based on excess spread levels. Excess spread is the amount by which income received by a trust during a
collection period, including interest collections, fees and interchange, exceeds the fees and expenses of the trust during
such collection period, including interest expense, servicing fees and charged-off receivables. In the event of an
economic early amortization, which would occur if the excess spread fell below 0% on a three-month rolling average
basis, we would be required to repay the affected outstanding securitized borrowings using available collections
received by the trust (the period of ultimate repayment would be determined by the amount and timing of collections
received). An early amortization event would negatively impact our liquidity, and require us to utilize our available
non-securitization related contingent liquidity or rely on alternative funding sources, which may or may not be available
at the time. As of December 31, 2015, the DiscoverSeries three-month rolling average excess spread was 14.03%.
At December 31, 2015, we had $15.6 billion of outstanding public asset-backed securities and $6.0 billion of
outstanding subordinated asset-backed securities that had been issued to our wholly-owned subsidiaries.
The following table summarizes expected contractual maturities of the investors’ interests in credit card
securitizations excluding those that have been issued to our wholly-owned subsidiaries (dollars in millions):
At December 31, 2015 Total Less Than One Year
One Year
Through
Three Years
Four Years
Through
Five Years After Five Years
Scheduled maturities of long-term borrowings - owed to
credit card securitization investors ..................................... $ 15,621 $ 3,050 $ 8,225 $ 4,346 $ —
The triple-A rating of DCENT Class A Notes issued to date has been based, in part, on an FDIC rule which
created a safe harbor that provides that the FDIC, as conservator or receiver, will not, using its power to disaffirm or
repudiate contracts, seek to reclaim or recover assets transferred in connection with a securitization, or recharacterize
them as assets of the insured depository institution, provided such transfer satisfies the conditions for sale accounting
treatment under previous GAAP. Although the implementation of the Financial Accounting Standards Board Accounting
Standards Codification Topic 860, Transfers and Servicing, no longer qualified certain transfers of assets for sale
accounting treatment, the FDIC approved a final rule that preserved the safe-harbor treatment applicable to revolving
trusts and master trusts, including DCMT, so long as those trusts would have satisfied the original FDIC safe harbor if
evaluated under GAAP pertaining to transfers of financial assets in effect prior to December 1, 2009. Other legislative
and regulatory developments may, however, impact our ability and/or desire to issue asset-backed securities in the
future.
Other Long-Term Borrowings—Student Loans
At December 31, 2015, we had $1.2 billion of remaining principal balance outstanding on securitized debt
assumed as part of the acquisition of Student Loan Corporation. Principal and interest payments on the underlying
student loans will reduce the balance of these secured borrowings over time.