Discover Financial Services Announces Transition of USD LIBOR-based Securities to Term SOFR and SOFR Spread-adjusted Swap Rates

By: Discover Financial Services via Business Wire

June 30, 2023 at 16:33 PM EDT

Discover Financial Services (NYSE: DFS) and Discover Bank (collectively “Discover”) have certain outstanding preferred stock and debt securities, listed in this press release (the “LIBOR-based Securities”), that use 3-month USD LIBOR or the 5-year USD LIBOR Mid-Swap Rate (collectively “LIBOR-based Benchmarks”) administered by ICE Benchmark Association Limited (“IBA”) as reference rates for determining interest rates and amounts payable to investors in the LIBOR-based Securities.

On March 5, 2021, the U.K. Financial Conduct Authority (the “FCA”) announced that all USD LIBOR settings will either cease publication or no longer be representative after June 30, 2023 (the "Cessation Date"). Following the FCA’s announcement, IBA announced on November 14, 2022, that it will cease publication of all USD LIBOR ICE Swap Rate settings based on USD LIBOR immediately after the Cessation Date.

Discover is issuing this press release to provide notice that, after the Cessation Date, it expects that calculations referencing the LIBOR-based Benchmarks in the LIBOR-based Securities specified here will no longer be made by reference to the LIBOR-based Benchmarks, but instead will be calculated pursuant to the applicable fallback provisions as described below. Use of such fallback provisions is expected to result in use of the 3-month Term SOFR or 5-year SOFR Swap Rate, as the case may be, with the appropriate tenor spread adjustments, on the first applicable date after the Cessation Date.

CUSIP	Security	First Applicable Date
254709AN8	Depositary shares representing a 1/100th interest in a share of 5.50% fixed-to-floating rate non-cumulative preferred stock, series C (“Series C Preferred Stock”)	October 28, 2027⁽¹⁾
25466AAN1	Fixed-to-fixed rate subordinated bank notes (“Subordinated Notes”)	August 7, 2023⁽²⁾

(1)		Redeemable at Discover’s option, subject to regulatory approval, either (i) in whole or in part on any dividend payment date on or after October 30, 2027, or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event.
(2)		Redeemable at Discover’s option, subject to regulatory approval, in whole but not in part, (i) on August 9, 2023, or (ii) at any time within 90 days following a regulatory capital treatment event.

In accordance with the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”) and the final regulations issued by the Board of Governors of the Federal Reserve System on December 16, 2022 implementing the LIBOR Act (the “LIBOR Rule”), the Series C Preferred Stock will transition to 3-month Term SOFR (as administered by CME Group Benchmark Administration, Ltd.) plus the relevant tenor spread adjustment of 0.26161% on the first applicable date after the Cessation Date, provided Discover does not exercise its option to redeem the Series C Preferred Stock on or before the first applicable date.

In March 2021, the U.S. Alternative Reference Rates Committee (“ARRC”) recommended a specific formula to determine the fallback rate for USD LIBOR Swap Rates. The ARRC’s recommended formula uses the applicable tenor of the USD SOFR ICE Swap Rate, adds the tenor spread adjustment for 3-month USD LIBOR of 0.26161% and applies technical adjustments to account for differences in payment frequency and day count conventions between swaps referencing USD LIBOR and SOFR (referred to as “SOFR Spread-adjusted Swap Rate”). On April 13, 2023, IBA announced that it intends to publish SOFR Spread-adjusted Swap Rates calculated in this manner starting on June 30, 2023, for use by market participants.

The terms of the Subordinated Notes currently provide that interest will accrue from August 9, 2023 at a rate per annum which will be 1.730% above the 5-Year Mid-Swap Rate. The 5-Year Mid-Swap Rate will be determined by reference to a designated screen page. If the designated screen page is not populated and no successor page is identified, the rate for such tenor will be determined by the Fiscal and Paying Agent by reference to a dealer poll, the parameters of which are expected to be in accordance with the ARRC’s recommended formula and result in a rate substantially similar to the SOFR Spread-adjusted Swap Rate. Any transition to a SOFR-based benchmark rate described above will only apply if Discover does not exercise its option to redeem the Subordinated Notes in August 2023.

Each of the LIBOR-based Securities will transition to a replacement rate as described herein. For the avoidance of doubt, this press release should not be construed as a notice of early redemption for any of these securities; Discover will determine whether to exercise its redemption options at an appropriate future date.

Forward-looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expectations with respect to the availability of SOFR Spread-adjusted Swap Rate and the Fiscal and Paying Agent’s determination of a fallback rate, among other matters, contain words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this press release, and there is no undertaking to update or revise them as more information becomes available.

About Discover

Discover Financial Services (NYSE: DFS) is a digital banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover® card, America's cash rewards pioneer, and offers private student loans, personal loans, home loans, checking and savings accounts and certificates of deposit through its banking business. It operates the Discover Global Network® comprised of Discover Network, with millions of merchants and cash access locations; PULSE®, one of the nation's leading ATM/debit networks; and Diners Club International®, a global payments network with acceptance around the world. For more information, visit www.discover.com/company.

View source version on businesswire.com: https://www.businesswire.com/news/home/20230630224546/en/

Contacts

Investor Contact:

Eric Wasserstrom

Investor Relations

224-405-4555

investorrelations@discover.com

Media Contact:

Matthew Towson

Public Relations

224-405-5649

matthewtowson@discover.com

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Discover Financial Services Announces Transition of USD LIBOR-based Securities to Term SOFR and SOFR Spread-adjusted Swap Rates

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