American Express 2006 Annual Report Download - page 49

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2006 fi nancial review
american express company
against the Company if cash flows generated from the
securitized 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. 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
availability of alternative liquidity sources, and credit
rating agency considerations.
The Company has developed a contingent funding
plan that enables it to meet its daily funding obligations
when access to unsecured funds in the debt capital
markets is impaired or unavailable. This plan is designed
to ensure that the Company and all of its main operating
entities could continuously maintain normal business
operations for a twelve-month period in which its
access to unsecured funds is interrupted. In addition,
the Company maintains substantial flexibility to
reduce its operating cash uses, such as through its share
repurchase program, and the delay or deferral of certain
operating expenses.
The funding sources that would be relied upon
depend on the exact nature of such a hypothetical
liquidity crisis; nonetheless, the Company’s liquidity
sources are designed with the goal of ensuring there
is sufficient cash on hand to fund business operations
over a twelve-month period regardless of whether the
liquidity crisis was caused by an external, industry, or
Company specific event. The contingent funding plan
also addresses operating flexibilities in quickly making
these funding sources available to meet all financial
obligations. The simulated liquidity crisis is defined as
a sudden and unexpected event that temporarily impairs
access to or makes unavailable funding in the unsecured
debt markets.
The contingent funding plan includes access to
diverse sources of alternative funding. Such sources
include but are not limited to its liquidity investment
portfolio, committed bank lines, intercompany
borrowings, sale of consumer, commercial card, and
small business loans and cardmember receivables through
its existing securitization programs and sale of other
eligible receivables. The Company estimates that, under
a worst case liquidity crisis scenario, it has identified up
to $37.5 billion in alternate funding sources available to
cover cash needs over the first 60 days after a liquidity
crisis has occurred.
Liquidity Investment 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, the Company has developed a liquidity
portfolio in which proceeds raised from such borrowings
are invested in longer term, highly liquid instruments,
such as U.S. Treasury securities and federal agency debt.
At December 31, 2006, the Company held $5.1 billion of
such securities under this program. In addition, Credco
entered into securities lending agreements in June 2006
with other financial institutions to enhance investment
income. At December 31, 2006, the liquidity investment
portfolio included approximately $716 million of
investment securities loaned under these agreements.
The invested amounts of the liquidity portfolio
provide 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 portfolio will be of
the highest credit quality and most liquid of investment
instruments available. The Company can easily sell these
securities or enter into sale/repurchase agreements to
immediately raise cash proceeds to meet liquidity needs.
Committed Bank Credit Facilities
The Company maintained committed bank credit
facilities with 38 financial institutions totaling $11.6
billion, of which $2.7 billion was outstanding. During
2006, the Company renewed and extended a total of
$3.3 billion and increased approximately $785 million
of these facilities. Credco has the right to borrow a
maximum amount of $10.8 billion (including amounts
outstanding) under these facilities, with a commensurate
maximum $1.2 billion reduction in the amount available
to the Parent Company. The Company’s facilities expire
as follows (billions): 2009, $3.3; 2010, $5.0; and 2011,
$3.3.
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, 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 applicable regulatory capital adequacy
guidelines. At December 31, 2006, the Company’s
consolidated tangible net worth was approximately
$9.0 billion, Credco’s ratio of combined earnings and
fixed charges to fixed charges was 1.44 and Centurion
Bank and FSB each exceeded their regulatory capital
adequacy guidelines.