American Express 2007 Annual Report Download - page 47

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
an unspecified amount of debt available for issuance under shelf
registrations filed with the SEC. In addition, TRS, Centurion
Bank, FSB, Credco, and American Express Overseas Credit
Corporation Limited, a wholly-owned subsidiary of Credco,
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 equity capital and funding strategies are
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, 2007, 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.
A downgrade of the Company’s debt ratings would increase
its borrowing costs. Management believes a decline in the
Company’s long-term credit rating by two levels would 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 also 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 the strength of
its franchise.
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. At December 31, the
Charge Trust held total assets of:
(Billions) 2007 2006
Total assets $9.0 $9.6
Long-term debt $3.1 $1.2
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
Lending Trust. In a securitization structure like the Lending
Trust (a revolving master trust), credit card accounts are selected
and the rights to the current cardmember loans, as well as future
cash flows 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, 2007, the amount of seller’s interest
was approximately 56 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
release of credit reserves, 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 that 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.
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