Morgan Stanley warned that its Discover Bank would take a charge of up to $250 million in its fiscal fourth quarter, which will end Nov. 30, because of last month's spike in consumer bankruptcy filings.
The charge will reflect the reduction of residual interests from the issuer's credit card securitizations and increased loan-loss provisions for the credit card receivables on its balance sheet, Morgan Stanley said Monday.
It is also putting some of its receivables back on the balance sheet, at least temporarily.
Fiscal third-quarter earnings at Discover, of Riverwoods, Ill., fell 28% from a year earlier, to $239 million.
If the excess spread, or profits, from its securitizations fell below a certain level, Discover would have to put that debt back on to its balance sheet.
But Morgan Stanley said it does not expect that to happen on any of Discover's term asset-backed securities.
Rather, the company expects the excess spread to recover in subsequent months, when bankruptcy filings return to normal levels.
To prevent a violation of the company's securitization agreements, however, Discover has notified the trustee that it will retire one series of commercial paper with additional provisions related to minimum excess spread.
As a result, $4 billion of receivables will go back on the balance sheet.
Discover plans to resecuritize those receivables, and another $1.5 billion backing maturing securities, in the next fiscal quarter. Mike Dean, a managing director at Fitch Inc., said it is waiting for the filing "bubble" from the bankruptcy law that went into effect last month to burst before issuing those securities.
Morgan Stanley said that if it is not confident on Nov. 30 that it can resecuritize those debts by Feb. 28, the loan-loss provision could rise by another $250 million.
Mr. Dean said the spike in bankruptcy filings would not necessarily affect Discover more than any other card issuer.
His agency is still talking to various issuers to determine the final effects of the bankruptcy law.
"We are very concerned across the board for most issuers," he said. "This is not something they anticipated."
