American Express 2007 Annual Report Download - page 49

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
crisis is assumed to occur as a sudden and unexpected event that
temporarily impairs access to or makes unavailable financing
in the unsecured debt markets. 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 contingent liquidity plan includes access to diverse
sources of alternative funding. Such sources include, but are
not limited to, the Company’s liquidity investment portfolio,
sale of consumer, commercial card, and small business loans
and cardmember receivables through its existing securitization
programs, committed bank credit facilities, intercompany
borrowings, and sale of other eligible receivables. The Company
estimates that, under a worst case liquidity crisis scenario, it
has identified over $40 billion in alternate funding sources in
a liquidity crisis.
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
high credit quality, highly liquid short-term instruments. In
addition, the Company’s contingent liquidity plan includes
access to a continuing liquidity portfolio in which proceeds
raised from funding activities are invested in longer term,
highly liquid instruments, such as U.S. Treasury securities and
government sponsored entity debt. 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 sell these securities or enter into
sale/repurchase agreements to immediately raise cash proceeds
to meet liquidity needs. At December 31, 2007, the Company
held $5.1 billion of such securities under this program.
Credco entered into securities lending agreements in June
2006 with other financial institutions to enhance investment
income. At December 31, 2007, the liquidity investment
portfolio included approximately $970 million of investment
securities loaned under these agreements.
Contingent Securitization Capacity
A key source in the Company’s contingent liquidity plan is
asset securitization. Approximately $25 billion of additional
consumer loans, commercial card loans, small business loans
and cardmember receivables could be sold over time to
investors through the existing securitization trust in the event a
liquidity crisis has occurred. The Company has added, through
the establishment of the Charge Trust, the capabilities to sell
a wider variety of cardmember receivable portfolios to further
enhance the Company’s flexibility in accessing diverse funding
sources on a contingency basis.
The Company believes that the securitized financing
would be available through many adverse conditions due
to the structure and size of the card securitization market.
Its liquidity plans expect that pricing, investor demand, and
structural subordination levels for card securitizations would
change under adverse conditions. Proceeds from secured
financings completed during a liquidity crisis could be used to
meet current obligations, to reduce or retire other contingent
liquidity sources such as bank credit lines, or a combination of
the two. However, other factors affect the Company’s ability
to securitize loans and receivables, such as credit quality of the
assets and the legal, accounting, regulatory, and tax environment
for securitization transactions. Material changes in any of these
factors may potentially limit the Company’s ability to securitize
its loans and receivables and could introduce certain risks to
the Company’s ability to meet its financial obligations. In such
a case, the use of investment securities, asset dispositions, asset
monetization strategies, and flexibility to reduce operating cash
needs could be utilized to meet its liquidity needs.
Committed Bank Credit Facilities
The Company maintained committed bank credit facilities at
December 31, 2007 as follows:
(Billions) Total
Parent
Company Credco
Centurion
Bank FSB
Committed(a) $12.4 $1.2 $10.4(b) $0.4 $0.4
Outstanding $ 3.5 $ — $ 3.5 $ — $ —
(a) Committed lines supported by 37 financial institutions.
(b) Credco has the right to borrow a maximum amount of $11.6 billion with a
commensurate maximum $1.2 billion reduction in the amount available to
Parent Company.
The Company’s committed facilities expire as follows:
(Billions)
2008 $ 0.3
2010 2.0
2011 3.4
2012 6.7
Total $12.4
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, 2007, the Company’s consolidated tangible
net worth was approximately $9.6 billion, Credco’s ratio of
combined earnings and fixed charges to fixed charges was 1.38
and Centurion Bank and FSB each exceeded their regulatory
capital adequacy guidelines.
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