American Express 2005 Annual Report Download - page 40

Asset Securitizations
The Company periodically securitizes cardmember
receivables and loans arising from its card business. The
securitization market provides the Company with cost-
effective funding. Securitization of cardmember receiv-
ables and loans is accomplished through the transfer of
those assets to a trust, which in turn issues securities to
third-party investors collateralized by the transferred
assets. The proceeds from issuance are distributed to the
Company, through its wholly-owned subsidiaries, as
consideration for the transferred assets. Securitization
transactions are accounted for as either a sale or secured
borrowing, based upon the structure of the transaction.
Securitization of cardmember receivables generated
under designated consumer charge card accounts is
accomplished through the transfer of cardmember
receivables to the Charge Trust, beginning in 2005 when
the trust was established, or the American Express Master
Trust (AEMT), in periods prior to July 2005. AEMT was
dissolved during the third quarter of 2005. Securitiza-
tions of these receivables are accounted for as secured
borrowings because the Charge Trust and AEMT are not
qualifying special purpose entities (QSPE). Accordingly,
the related assets being securitized are not accounted for
as sold and continue to be reported as owned assets on
the Company’s Consolidated Balance Sheets. The related
securities issued to third-party investors are reported as
long-term debt on the Company’s Consolidated Balance
Sheets. As of December 31, 2005 and 2004, the Charge
Trust and AEMT held total assets of $9.9 billion and $7.4
billion, respectively.
Securitization of cardmember loans generated under
designated consumer lending accounts is accomplished
through the transfer of cardmember loans to a QSPE, the
Lending Trust. Securitizations of loans transferred to the
Lending Trust are accounted for as sales. Accordingly,
the Company removes the loans from its Consolidated
Balance Sheets and recognizes both a gain on sale and
other retained interests in the securitization as discussed
below. As of December 31, 2005 and 2004, the Lending
Trust held total assets of $28.9 billion and $24.7 billion,
respectively, of which $21.2 billion and $20.3 billion,
respectively, had been sold.
The Company’s continued involvement with the secu-
ritized cardmember loans includes the process of man-
aging and servicing the securitized loans through its
subsidiary, TRS, for which it earns a fee. In addition, the
Company, through its subsidiaries, maintains an undi-
vided, pro-rata interest in all loans transferred (or sold),
which is referred to as seller’s interest, and is generally
equal to the balance of the loans in the Lending Trust
less the investors’ portion of those assets. As the amount
of the loans in the Lending Trust fluctuates due to
customer payments, new charges and credit losses, the
carrying amount of the seller’s interest will vary. How-
ever, the seller’s interest is required to be maintained at
a minimum level of 7 percent of the outstanding
invested amount in the Lending Trust. As of
December 31, 2005, the amount of seller’s interest was
approximately 25 percent of outstanding invested
amount, well above the minimum requirement.
The Company also retains subordinated interests in the
securitized loans. Such interests include one or more
investments in tranches of the securitization and an
interest-only strip. As of December 31, 2005 and 2004,
the fair value of the subordinated retained interests was
$279 million and $315 million, respectively.
Under the respective terms of the Lending Trust and the
Charge Trust agreements, the occurrence of certain
events could result in either trust being required to
paydown the investor certificates and notes before their
expected payment dates over an early amortization
period. An example of such an event is, for either trust,
the failure of the securitized assets to generate specified
yields over a defined period of time.
No such events have occurred during 2005 and 2004,
and the Company does not expect an early amortization
trigger event to occur prospectively. In the event of a
paydown of the Lending Trust, $21.2 billion of assets
would revert to the balance sheet and an alternate source
of funding of a commensurate amount would have to be
obtained. Had a total paydown of the Lending Trust
hypothetically occurred at a single point in time at
December 31, 2005, the cumulative negative effect on
results of operations would have been approximately
$751 million pretax to re-establish reserves and to
derecognize the retained interests related to these
securitizations that would have resulted when the
securitized loans reverted back onto the balance sheet.
Virtually no financial statement impact would occur from
a paydown of the Charge Trust, but an alternate source of
funding for the $1.2 billion of securities outstanding at
December 31, 2005 would have to be obtained.
With respect to both the Lending Trust and the Charge
Trust, a decline in the actual or implied short-term credit
rating of TRS below A-1/P-1 will trigger a requirement that
TRS, as servicer, transfer collections on the securitized
assets to investors on a daily, rather than a monthly, basis
or make alternative arrangements with the rating agencies
Financial Review
AXP / AR.2005
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