American Express 2001 Annual Report Download - page 34

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FINANCIAL REVIEW
addition, the company maintains committed back-up lines of credit ($10 billion to support Credco commercial paper and $3 bil-
lion for other purposes). See each segment’s Liquidity and Capital Resources section for discussion of specific activities.
The availability of the credit lines is subject to the company’s compliance with certain financial covenants, including the mainte-
nance by the company of consolidated tangible net worth of at least $6.5 billion, the maintenance by Credco of a 1.25 ratio of com-
bined earnings and fixed charges to fixed charges and the compliance by Centurion Bank with applicable regulatory capital
adequacy guidelines. At December 31, 2001, consolidated tangible net worth was approximately $11.1 billion, Credco’s ratio
of combined earnings and fixed charges to fixed charges was 1.29 and Centurion Bank exceeded the FDIC’s “well capitalized”
regulatory capital adequacy guidelines.
The company’s credit ratings are critical to maintaining short-term funding sources and determining related interest costs. Rating
agencies review factors such as capital adequacy with a view towards maintaining certain levels of capital, liquidity, business vol-
umes, asset quality and economic market trends, among others, in assessing the company’s appropriate ratings. Subsequent to the
terrorist attacks of September 11th, the company’s A+ and its subsidiaries’ credit ratings were affirmed by Standard & Poor’s and
Fitch, two credit rating agencies. At the same time, however, each agency revised its respective rating outlook on the company and
its subsidiaries from stable to negative in light of the ensuing weak climate for business and consumer travel and spending and
weaker capital markets. In their statements,the rating agencies indicated that while the company has significant financial resources
to address short-term business volume disruptions, if business volumes remained depressed for an extended period, its credit rat-
ings would be under pressure. See Risk Management section below for a discussion of the effect of a two level downgrade.
The Parent Company has short-term funding needs relating to shareholder dividends and other general corporate purposes. These
are generally met through an intercompany dividend policy. The Board of Directors has authorized a Parent Company commercial
paper program that is supported by a $1.9 billion multi-purpose credit facility that expires in increments through 2006. No bor-
rowings have been made under this credit facility, and there was no Parent Company commercial paper outstanding during 2001
or 2000.
Total Parent Company long-term debt outstanding was $2.1 billion and $1.4 billion at December 31, 2001 and 2000, respectively.
During 2001, the Parent Company issued in two traunches an aggregate of $1 billion of 5.5 percent notes due 2006, using the pro-
ceeds for general corporate purposes. At December 31,2001 and 2000, the Parent Company had $3.6 billion and $4.6 billion,respec-
tively, of debt or equity securities available for issuance under shelf registrations filed with the SEC. In addition, TRS, Centurion
Bank, Credco, American Express Overseas Credit Corporation Limited, a wholly-owned subsidiary of Credco, and AEB have estab-
lished programs for the issuance, outside the United States, of debt instruments to be listed on the Luxembourg Stock Exchange.
The maximum aggregate principal amount of debt instruments outstanding at any one time under the program will not exceed
$6.0 billion. At December 31, 2001 and 2000,$1.3 billion and $1.6 billion of debt, respectively, was outstanding under this program.
RISK MANAGEMENT
The company’s objective is to monitor and control risk exposures to earn returns commensurate with the level of risk assumed.
Management establishes and oversees implementation of Board-approved policies covering the company’s funding, investments
and the use of derivative financial instruments. The company’s treasury department, along with various asset and liability com-
mittees in the businesses, is responsible for managing financial market risk exposures within the context of Board-approved poli-
cies. See Note 10 to the Consolidated Financial Statements for a discussion of the company’s use of derivatives.
In the second half of 2001, the company established the Corporate Risk Management Committee (CRMC) to supplement the
risk management capabilities resident within its business segments by routinely reviewing key market, credit and other risk
concentrations across the company and recommending corrective action where appropriate. The CRMC promotes a rigorous
understanding of risks across the company and supports senior management in making risk-return decisions.
Management considers the risk of liquidity and cost of funds from the company’s market related activities. Management believes
a decline in the company’s long-term credit rating by two levels could result in the company having to significantly reduce its com-
mercial paper and other short-term market borrowings and replace them, in part, by taking down existing credit lines. Remaining