American Express 2005 Annual Report Download - page 41

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to allow TRS to continue to transfer collections on a
monthly basis. Such alternative arrangements include
obtaining appropriate guarantees for the performance of
the payment and deposit obligations of TRS, as servicer.
No officer, director or employee holds any equity inter-
est in the trusts or receives any direct or indirect
compensation from the trusts. The trusts in the Compa-
ny’s securitization programs do not own stock of the
Company or the stock of any affiliate. Investors in the
securities issued by the trusts have no recourse against
the Company if cash flows generated from the securi-
tized assets are inadequate to service the obligations of
the trusts.
Liquidity
The Company balances the trade-offs between having
too much liquidity, which can be costly and limit
financial flexibility, with having inadequate liquidity,
which may result in financial distress during a liquidity
event (see Contingent Liquidity Planning section
below). The Company considers various factors in
determining its liquidity needs, such as economic and
financial market conditions, seasonality in business
operations, growth in business segments, cost and avail-
ability of alternative liquidity sources and credit rating
agency considerations.
The Company believes that its existing sources of
funding provide sufficient depth and breadth to meet
normal operating needs. In addition, alternative
liquidity sources are available, mainly in the form of the
liquidity portfolio, securitizations of cardmember
receivables and loans and committed bank credit
facilities, to provide uninterrupted funding over a
twelve-month period should access to unsecured debt
sources become impaired.
Liquidity Portfolio
During the normal course of business, funding activities
may raise more proceeds than are necessary for
immediate funding needs. These amounts are invested
principally in short-term overnight, highly liquid
instruments. In addition, in the fourth quarter of 2003,
the Company began a program to develop a liquidity
portfolio in which proceeds raised from such borrow-
ings are invested in longer term, highly liquid instru-
ments, such as U.S. Treasury securities. At December 31,
2005, the Company held $5.0 billion of U.S. Treasury
notes under this program.
The invested amounts of the liquidity portfolio pro-
vide back-up liquidity, primarily for the commercial
paper program at Credco, and also flexibility for
other short-term funding programs at Centurion Bank
and FSB. Instruments held within this program will be
of the highest credit quality and most liquid of invest-
ment instruments available. The Company can easily
sell these securities or enter into sale/repurchase agree-
ments to immediately raise cash proceeds to meet
liquidity needs.
Committed Bank Credit Facilities
The Company maintained committed bank credit facili-
ties with 43 large financial institutions totaling $13.4
billion, of which $3.3 billion was outstanding under
these facilities. During 2005, the Company renewed and
extended a total of $7 billion of these credit line facili-
ties. Credco has the right to borrow a maximum amount
of $12.6 billion (including amounts outstanding) under
these facilities, with a commensurate maximum $2.1
billion reduction in the amount available to the Parent
Company. The Company’s facilities expire as follows
(billions): 2006, $2.0; 2009, $6.4; and 2010, $5.0.
The availability of the credit lines is subject to the
Company’s compliance with certain financial covenants,
including the maintenance by the Company of
consolidated tangible net worth of at least $4.1 billion
($9.0 billion prior to the spin-off of Ameriprise), the
maintenance by Credco of a 1.25 ratio of combined
earnings and fixed charges to fixed charges, and the
compliance by Centurion Bank and FSB with appli-
cable regulatory capital adequacy guidelines. At
December 31, 2005, the Company’s consolidated tan-
gible net worth was approximately $9.2 billion, Credco’s
ratio of combined earnings and fixed charges to fixed
charges was 1.41 and Centurion Bank and FSB each
exceeded the Federal Deposit Insurance Corporation’s
well-capitalized regulatory capital adequacy guidelines.
Committed bank credit facilities do not contain material
adverse change clauses, which may preclude borrowing
under the credit facilities. The facilities may not be ter-
minated should there be a change in the Company’s
credit rating.
In addition, TRS, Centurion Bank, Credco, American
Express Overseas Credit Corporation Limited, a wholly-
owned subsidiary of Credco, and American Express Bank
Ltd. have established a program 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 cannot exceed $6.0 billion. Financial Review
AXP / AR.2005
[39 ]