American Express 2003 Annual Report Download - page 57

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(p.55_axp_ financial review)
In 2004, TRS along with its subsidiaries, Credco and Centurion Bank, expects to issue approximately $20 billion in long-
term debt to fund business growth and refinance maturing debt. This amount includes approximately $2.6 billion in con-
nection with the Company’s liquidity portfolio (which is discussed further in the Liquidity section below). The Company
expects that its planned funding during the next year will be met through a combination of sources similar to those on
which it currently relies. However, the Company continues to assess its needs and investor demand and may change its
funding mix. The Company’s funding plan is subject to various risks and uncertainties, such as disruption of financial mar-
kets, market capacity and demand for securities offered by the Company, accounting or regulatory changes, ability to sell
receivables, and the performance of receivables previously sold in securitization transactions. Many of these risks and uncer-
tainties are beyond the Company’s control.
As of December 31, 2003, Credco had the ability to issue approximately $9.8 billion of debt securities under shelf registra-
tion statements filed with the SEC.
Cost of Funds
Cost of funds is generally determined by a margin or credit spread over a benchmark interest rate. Credit spreads are mea-
sured in basis points where 1 basis point equals one one-hundredth of one percentage point. It is the smallest measure used
in quoting borrowing spreads. Commercial paper and other short-term debt funding costs are based on spreads bench-
marked against London Interbank Offered Rate (LIBOR), a commonly used interest rate. Costs for unsecured long-term
debt and securitized funding are based on spreads benchmarked against LIBOR, U.S. Treasury securities of similar maturi-
ties, or other rates. The table below highlights average indicative spreads for 5-year unsecured and securitized funding.
Spreads shown are off of 1 month LIBOR for each respective time period:
(Spread in basis points*) 2003 2002 2001
Unsecured debt 21 45 37
Securitized debt** 11 12 13
*Indicative spreads for each respective period.
** For AAA Lending Asset Backed Certificates only.
Securitizations
TRS uses asset securitization as a part of its overall funding program. TRS’ securitization programs are similar to those widely
used by many financial institutions. The securitization market in the United States is highly liquid, efficient and mature
with over $1.3 trillion of asset-backed securities outstanding at December 31, 2003. This market provides TRS with very
cost-effective funding for its long-term funding needs. TRS, through its special purpose subsidiaries, principally securitizes
its cardmember charge card receivables and cardmember loans arising from its card businesses.
Asset securitization involves selling receivables or loans into a separate legal entity, typically a trust. The trust issues interest-
bearing certificates, commonly referred to as asset-backed securities, to third-party investors which are secured by the future
collections on the sold receivables or loans. The trust utilizes the proceeds from the sale of such securities to pay the pur-
chase price for receivables or loans that were sold into the trust. TRS, through its subsidiaries, retains an interest in the secu-
ritized receivables that may be represented by subordinated securities, undivided interests in receivables or loans, restricted
cash held in segregated reserve funds for the benefit of the trust and interest-only strips. TRS’ use of trusts in its securitiza-
tion programs conforms to standard practices in the securitization market. The trusts are used in securitizations to segre-
gate the sold receivables or loans for the benefit of the asset-backed securities investors. Assuming the criteria of
securitization accounting rules are met under generally accepted accounting principles, the sold receivables and loans are
removed from the balance sheet of the trust’s sponsor and the certificates are not recorded as a liability.