American Express 2007 Annual Report Download - page 89

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
The three key economic assumptions and the sensitivity of the
current year’s fair value of the interest-only strip to immediate
10 percent and 20 percent adverse changes in these assumptions
are as follows:
(Millions, except rates per annum)
Monthly
Payment
Rate
Expected
Credit
Losses
Cash Flows
from
Interest-
only
Strips
Discounted
at
Assumption 24.7% 4.3% 12.0%
Impact on fair value of
10% adverse change $ (14) $(22) $ (0.4)
Impact on fair value of
20% adverse change $ (28) $(43) $ (0.9)
This sensitivity analysis does not represent management’s
expectations of adverse changes in these assumptions but is
provided as a hypothetical scenario to assess the sensitivity of
the fair value of the interest-only strip to changes in key inputs.
Management cannot extrapolate changes in fair value based
on a 10 percent or 20 percent change in all key assumptions
simultaneously in part because the relationship of the change
in one assumption on the fair value of the retained interest is
calculated independently from any change in another assumption.
Changes in one factor may cause changes in another, which could
magnify or offset the sensitivities. The table below summarizes
cash flows received from the Lending Trust for the years ended
December 31:
(Millions) 2007 2006
Proceeds from new securitizations
during the period $ 5,909 $ 3,491
Proceeds from collections reinvested in
revolving cardmember securitizations $63,714 $62,411
Servicing fees received $ 425 $ 407
Other cash flows received on retained
interests from interest-only strips $ 2,407 $ 2,517
ON-BALANCE SHEET SECURITIZATIONS
The Company’s securitizations of cardmember receivables are
accounted for as secured borrowing, rather than as qualifying
sales, because the receivables are transferred to a non-qualifying
special purpose entity, the American Express Issuance Trust
(the Charge Trust). The Charge Trust is considered a variable
interest entity, which is consolidated by American Express
Receivables Financing Corporation V, LLC, its primary
beneficiary, which is in turn consolidated by the Company. The
cardmember receivables securitized through this entity are not
accounted for as sold and the securities issued by this entity
to third-party investors are reported as long-term debt on the
Company’s Consolidated Balance Sheets.
The following table summarizes the total assets and
liabilities held by the Charge Trust at December 31:
(Billions) 2007 2006
Assets $9.0 $9.6
Liabilities 3.1 1.2
These receivables are available only for payment of the debt
or other obligations issued or arising in the securitization
transactions. The long-term debt is payable only out of
collections on the underlying securitized assets.
87