American Express 2009 Annual Report Download - page 89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN EXPRESS COMPANY
NOTE 7
ASSET SECURITIZATIONS
The Company periodically securitizes cardmember
receivables and loans arising from its card business through
the transfer of those assets to a trust. The trust then issues
securities to third-party investors, collateralized by the
transferred assets. Securitization transactions are accounted
for as either sales or secured borrowings, based on the
structure of the transaction and the current GAAP
requirements. Refer to Note 1 for a description of the changes
in GAAP governing the accounting for transfers of financial
assets, which will result in all securitization transactions being
accounted for as secured borrowings by the Company
effective January 1, 2010.
Based on GAAP in effect at December 31, 2009, in order
for a securitization of financial assets to be accounted for as a
sale, the transferor must surrender control over those
financial assets to the extent that the transferor receives
consideration other than beneficial interests in the transferred
assets.
Cardmember loans are transferred to the American
Express Credit Account Master Trust, the Lending Trust,
which meets the criteria of a qualifying special purpose entity
(QSPE), and such transactions qualify as accounting sales
through year-end, 2009. Accordingly, when loans were sold
through securitizations, the Company removed the loans
from its Consolidated Balance Sheets and recognized a gain or
loss on sale and retained interests in the securitizations.
Cardmember receivables are transferred to the American
Express Issuance Trust, the Charge Trust, which is not a
QSPE. Securitizations of cardmember receivables are
accounted for as secured borrowings.
OFF-BALANCE SHEET SECURITIZATIONS
Servicing Portfolio
In consideration for the transfer of the current cardmember
loans, as well as the future cash flows related to the
cardmember account, the Company, through its subsidiaries,
receives an undivided, pro rata interest in the trust referred to
as seller’s interest, which is equal to the balance of all
cardmember loans ($36.2 billion and $40.5 billion as of
December 31, 2009 and 2008, respectively) transferred to the
Lending Trust plus the associated accrued interest receivable
($918 million and $1.1 billion at December 31, 2009 and
2008, respectively) less the investors’ portion of those assets
(securitized cardmember loans). Seller’s interest is reported as
cardmember loans on the Company’s Consolidated Balance
Sheets. Any accrued interest related to the investors’ portion
of securitized cardmember loans is reported as other assets on
the Company’s Consolidated Balance Sheets.
The Company retains servicing responsibilities for the
transferred cardmember loans through its subsidiary,
American Express Travel Related Services Company, Inc.
(TRS), and earns a related fee. No servicing asset or liability is
recognized at the time of a securitization because the
Company receives adequate compensation relative to current
market servicing fees.
The following table illustrates the activity in the Lending
Trust (including the securitized cardmember loans and
seller’s interest) for the years ended December 31:
(Millions) 2009 2008
Lending Trust assets, January 1 $41,579 $ 36,194
Account additions, net 2,956 10,187
Cardmember activity, net (7,457) (4,802 )
Lending Trust assets, December 31 $37,078 $ 41,579
Securitized cardmember loans, January 1 $28,955 $ 22,670
Impact of issuances, external 2,250 9,640
Impact of issuances, retained 2,013 1,315
Impact of maturities (4,892 ) (4,670)
Securitized cardmember loans, December 31 $28,326 $ 28,955
Seller’s interest, January 1 $12,624 $ 13,524
Impact of issuances (4,263) (10,955)
Impact of maturities 4,892 4,670
Account additions, net 2,956 10,187
Cardmember activity, net (7,457) (4,802 )
Seller’s interest, December 31 $ 8,752 $ 12,624
The Company announced in the second quarter of 2009 that
certain actions affecting outstanding series of securities issued
by the Lending Trust were completed in order to adjust the
credit enhancement structure of substantially all of the
outstanding series of securities previously issued by the
Lending Trust. These actions were to address the concerns of
rating agencies and the decline in the trust excess spread due
to the performance of the underlying credit card receivables
in the Lending Trust. The actions, which are permitted by the
transaction documents governing the Lending Trust,
consisted of the following:
1. Issuance of two new series of investor certificates
(collectively, the “Series D Certificates”) equaling
approximately $1.5 billion in aggregate. The Series D
Certificates were acquired by the Company in exchange
for a portion of the sellers’ interest in the Lending Trust.
The D Certificates, which were issued at a market
interest rate, are subordinated to all other investor
certificates and therefore provide additional credit
enhancement to all outstanding series. These certificates
have various maturities, including a final maturity of
2018.
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