American Express 2006 Annual Report Download - page 48

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2006 fi nancial review
american express company
Charge Trust held total assets of $9.6 billion and $9.9
billion, respectively, with $1.2 billion of long-term debt
outstanding at December 31, 2006 and 2005.
Securitization of the Company’s cardmember loans
generated under designated consumer lending accounts
is accomplished through the transfer of cardmember
loans to a QSPE, the American Express Credit Account
Master Trust (Lending Trust). In a securitization
structure like the Lending Trust (a revolving master
trust), credit card accounts are selected and the rights to
t he cu r re nt c ard me mb er loa ns , as we l l a s f ut u re c ash f lows
related to the corresponding accounts, are transferred to
the trust for the life of the accounts. In consideration
for the transfer of these rights, the Company, through
its wholly-owned subsidiaries, receives an undivided,
pro rata interest in the trust referred to as the “seller’s
interest”, which is reflected on balance sheet as a
component of cardmember loans. The seller’s interest
is required to be maintained at a minimum level of 7
percent of the outstanding securities in the Lending
Trust. As of December 31, 2006, the amount of seller’s
interest was approximately 67 percent of outstanding
securities, above the minimum requirement. When the
Lending Trust issues a security to a third party, a new
investor interest is created. The Company removes the
corresponding cardmember loans from its Consolidated
Balance Sheets, recognizes a gain on sale and records an
interest-only strip. From time to time, the Company
may record other retained interests as well. The total
investors’ interest outstanding will change through new
issuances or maturities. The seller’s interest will change
as a result of new trust issuances or maturities as well
as new account additions, new charges on securitized
accounts, and collections. As seller’s interest changes
each period, the related allowance for loss will change as
well. When a security matures, the trust uses a portion
of the collections to repay the security, and as a result
the investors’ interest decreases. In the monthly period
which contains a maturity, new charges on securitized
accounts have historically been greater than the portion
of the collections required to repay the maturing
security, and therefore, seller’s interest has increased
in an amount greater than or equal to the decrease in
investors’ interest.
The Company’s continued involvement with the
securitized cardmember loans includes the process of
managing and servicing the securitized loans through
its subsidiary, TRS, for which it earns a fee. Any billed
finance charges related to the transferred cardmember
loans are reported as other receivables on the Company’s
Consolidated Balance Sheets. As of December 31, 2006
and 2005, the Lending Trust held total assets of $34.6
billion and $28.9 billion, respectively, of which $20.2
billion and $21.2 billion, respectively, had been sold
and $14.4 billion and $7.7 billion, respectively, had
been classified as seller’s interest. The fair value of the
interest-only strip and other retained interests was $266
million and $279 million at December 31, 2006 and
2005, 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 2006 and 2005,
and the Company does not expect an early amortization
trigger event to occur prospectively. In the event of a
paydown of the Lending Trust, $20.2 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, 2006, the cumulative negative effect on
results of operations would have been approximately $639
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, 2006 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 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
interest in the trusts or receives any direct or indirect
compensation from the trusts. The trusts in the
Company’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