American Express 2007 Annual Report Download - page 48

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
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. At December
31, the Lending Trust held total assets of:
(Billions) 2007 2006
Investors’ interest $22.7 $20.2
Seller’s interest 13.5 14.4
Lending Trust total assets $36.2 $34.6
At December 31, the fair value of the interest-only strip and
other retained interests were as follows:
(Millions) 2007 2006
Interest-only strip $223 $ 266
Subordinated securities 78 —
Total $301 $ 266
See the Consolidated Liquidity and Capital Resources section
and Note 6 to the Consolidated Financial Statements for details
regarding the Company’s securitization trusts.
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 pay down 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 2007 and 2006, and
the Company does not expect an early amortization trigger
event to occur prospectively. In the event of a paydown of the
Lending Trust, $22.7 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, 2007, the cumulative negative effect
on results of operations would have been approximately $973
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 $3.1 billion of securities outstanding at
December 31, 2007 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 such events have occurred
during 2007 and 2006.
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 against the Company if cash flows generated from
the securitized assets are inadequate to service the obligations
of the trusts.
Parent Company Funding
Parent Company long-term debt outstanding was $6.7 billion
and $6.0 billion at December 31, 2007 and 2006, respectively.
During 2007, the Parent Company issued $1.5 billion of 6.15
percent fixed-rate Senior Notes due 2017.
The Parent Company is authorized to issue commercial
paper. This program is supported by a $1.2 billion multi-
purpose committed bank credit facility. The credit facility
will expire in 2010 and 2012 in the amounts of $500 million
and $750 million, respectively. There was no Parent Company
commercial paper outstanding during 2007 and 2006, and no
borrowings have been made under its bank credit facility.
CONTINGENT LIQUIDITY STRATEGY
The Company seeks to ensure that it has adequate liquidity, that
is cash and equivalents on hand, as well as access to cash and
equivalents to continuously meet its business needs and satisfy
its obligations. Liquidity is managed through the breadth of
sources of its funding programs, as well as through the quality
and liquidity of its funded assets.
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 the amount of liquidity
it holds, such as economic and financial market conditions,
seasonality in business operations, growth in its businesses, cost
and availability of alternative liquidity sources, and regulatory
and credit rating agency considerations.
The Company has developed a contingent liquidity plan
that enables it to continuously meet its daily obligations when
access to unsecured funds in the debt capital markets becomes
impaired or they become inaccessible. This plan is designed to
ensure that the Company and all of its main operating entities
could continuously maintain normal business operations
for a 12-month period in which its access to unsecured debt
financing is interrupted. The hypothetical 12-month liquidity
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