American Express 2011 Annual Report Download - page 76

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AMERICAN EXPRESS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7
ASSET SECURITIZATIONS
CHARGE TRUST AND LENDING TRUST
The Company periodically securitizes cardmember receivables
and loans arising from its card business through the transfer of
those assets to securitization trusts. The trusts then issue
securities to third-party investors, collateralized by the
transferred assets.
Cardmember receivables are transferred to the American
Express Issuance Trust (the Charge Trust) and cardmember
loans are transferred to the Lending Trust. The Charge Trust and
the Lending Trust are consolidated by American Express Travel
Related Services Company, Inc. (TRS), which is a consolidated
subsidiary of the Company. The trusts are considered VIEs as
they have insufficient equity at risk to finance their activities,
which are to issue securities that are collateralized by the
underlying cardmember receivables and loans.
TRS, in its role as servicer of the Charge Trust and the Lending
Trust, has the power to direct the most significant activity of the
trusts, which is the collection of the underlying cardmember
receivables and loans in the trusts. In addition, TRS owns
approximately $1.0 billion of subordinated securities issued by
the Lending Trust as of December 31, 2011. These subordinated
securities have the obligation to absorb losses of the Lending
Trust and provide the right to receive benefits from the Lending
Trust, both of which are significant to the VIE. TRS’ role as
servicer for the Charge Trust does not provide it with a
significant obligation to absorb losses or a significant right to
receive benefits. However, TRS’ position as the parent company
of the entities that transferred the receivables to the Charge Trust
makes it the party most closely related to the Charge Trust. Based
on these considerations, TRS was determined to be the primary
beneficiary of both the Charge Trust and the Lending Trust.
The debt securities issued by the Charge Trust and the Lending
Trust are non-recourse to the Company. Securitized
cardmember receivables and loans held by the Charge Trust and
the Lending Trust are available only for payment of the debt
securities or other obligations issued or arising in the
securitization transactions. The long-term debt of each trust is
payable only out of collections on their respective underlying
securitized assets.
There was approximately $15 million and $9 million of
restricted cash held by the Charge Trust as of December 31, 2011
and 2010, respectively, and approximately $192 million and $3.7
billion of restricted cash held by the Lending Trust as of
December 31, 2011 and 2010, respectively, included in other
assets on the Company’s Consolidated Balance Sheets. These
amounts relate to collections of cardmember receivables and
loans to be used by the trusts to fund future expenses, and
obligations, including interest paid on investor certificates, credit
losses and upcoming debt maturities.
As a result of the adoption of new GAAP on consolidations
and VIEs, the Lending Trust was consolidated onto the
Company’s Consolidated Balance Sheets effective January 1,
2010. The primary changes made to the Consolidated Balance
Sheets upon consolidation include an increase to cardmember
loans of $29 billion, along with associated loss reserves of $2.5
billion. Other adjustments included the elimination of the
interest-only strip, as well as the elimination of the Company’s
retained subordinated securities issued by the Lending Trust.
Long-term debt increased by $25 billion for the debt securities
issued by the Lending Trust, and shareholders’ equity was
reduced by $1.8 billion related to the after-tax effect of
establishing the additional reserve for losses on cardmember
loans and for the reversal of unrealized gains on retained
subordinated securities. The components of securitization
income, net for the cardmember loans and long-term debt, are
now recorded in other commissions and fees, interest income
and interest expense.
CHARGE TRUST AND LENDING TRUST TRIGGERING
EVENTS
Under the respective terms of the Charge Trust and the Lending
Trust agreements, the occurrence of certain triggering events
could result in establishment of reserve funds, or in a worst-case
scenario, early amortization of investor certificates. During the
year ended December 31, 2011, no triggering events occurred
that would have resulted in funding of reserve accounts or early
amortization.
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