American Express 2006 Annual Report Download - page 47

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2006 fi nancial review
american express company
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 $10 billion.
The Company’s funding strategy is designed to
maintain high and stable debt ratings from the major
credit rating agencies, Moody’s, Standard & Poor’s
and Fitch Ratings. Maintenance of high and stable
debt ratings is critical to ensuring the Company has
continuous access to the capital and credit markets. It
also enables the Company to reduce its overall borrowing
costs. At December 31, 2006, the Parent Company debt
ratings were as follows:
Moody’s
Standard
& Poor’s
Fitch
Ratings
Short-term P-1 A-1 F1
Senior unsecured A1 A+ A+
The Company actively manages the risk of liquidity
and cost of funds resulting from the Company’s
financing 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 commercial paper and other short-term
borrowings. Remaining borrowing requirements would
be addressed through other means such as the issuance
of long-term debt, additional securitizations, increased
deposit taking, and the sale of investment securities or
drawing on existing credit lines. This would result in
higher interest expense on the Company’s commercial
paper and other debt, as well as higher fees related to
unused lines of credit. The Company believes a two level
downgrade is highly unlikely due to its capital position
and growth prospects.
Parent Company Funding
Total Parent Company long-term debt outstanding was
$6.0 billion and $5.2 billion at December 31, 2006 and
2005, respectively. During 2006, the Parent Company
issued $750 million of fixed-rate Subordinated
Debentures due 2036. These Subordinated Debentures
are automatically extendable until 2066 unless certain
events occur prior to that date. The Subordinated
Debentures will accrue interest at an annual rate of 6.80
percent until September 1, 2016 and at an annual rate
of three-month LIBOR plus 2.23 percent thereafter.
The Parent Company also issued $400 million of 5.25
percent and $600 million of 5.50 percent fixed-rate
Senior Global Notes due 2011 and 2016, respectively.
As of December 31, 2005, the Parent Company
had $2 billion principal outstanding of 1.85 percent
Convertible Senior Debentures due 2033 (the Senior
Debentures), which were unsecured obligations of the
Compa ny. On D ecember 1, 2 00 6, the Senior D ebentu re s
were remarketed into unsecured, floating rate Senior
Notes due 2033 (the Senior Notes). The Senior Notes
may be put to the Company at par on June 5, 2008 and
accrue interest at an annual rate of three-month LIBOR
plus 11.453 basis points. Contingent interest payments
up to 4 percent are required if the Senior Notes are not
rated at certain levels by the rating agencies.
The Parent Company is authorized to issue
commercial paper. This program is supported by a $1.2
billion multi-purpose committed bank credit facility
that expires in 2010. There was no Parent Company
commercial paper outstanding during 2006 and 2005,
and no borrowings have been made under its bank
credit facility.
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
receivables and loans is accomplished through the transfer
of those assets to a trust, which in turn issues certificates
or notes (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 and small
business charge card accounts is accomplished through
the transfer of cardmember receivables to the American
Express Issuance Trust (Charge Trust). Securitizations
of these receivables are accounted for as secured
borrowings because the Charge Trust is not a qualifying
special purpose entity (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, 2006 and 2005, the