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NEW YORK — Moody's Investors Service on Monday cut its senior unsecured debt rating for Discover Financial Services into non-investment grade territory, citing risks the credit card company faces from the prolonged credit crunch and recession.
The New York-based ratings agency also assigned a negative outlook to Discover Financial, signaling further downgrades are possible if business conditions worsen.
Moody's cut its rating on the Riverwoods, Ill.-based company's senior unsecured debt one notch to Ba1 — Moody's highest "speculative grade" or "junk" level, indicating questionable credit quality — from Baa3. Moody's also cut the senior unsecured rating of wholly owned subsidiary Discover Bank one notch to Baa3 from Baa2 — a downgrade that keeps that rating investment-grade, but moves it just one step above junk.
Moody's said the credit crunch and recession have hurt the quality of Discover Financial's credit and reduced its financial flexibility by limiting access to the securitization market, which Moody's said is "historically a significant funding source for the company."
The credit card issuer and electronic payments services company has become "highly reliant on brokered deposits, a wholesale and confidence-sensitive funding source," Moody's said.
In addition, stricter regulation of the credit card industry and a newly approved federal law could hurt Discover Financial more than its rivals because it is less diversified, Moody's said.
Despite those challenges, Discover Financial "is well capitalized and maintains a solid franchise in the U.S. general purpose credit card market," Moody's said.
Amid a broad market rally Monday, shares of Discover Financial rose 56 cents, or nearly 5.9 percent, to $10.12 in midday trading. The stock has traded in a 52-week range of $4.73 to $18.15.
