American Express 2012 Annual Report Download - page 36

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
ASSET SECURITIZATION PROGRAMS
The Company periodically securitizes cardmember receivables
and loans arising from its card business, as the securitization
market provides the Company with cost-effective funding.
Securitization of cardmember receivables and loans is
accomplished through the transfer of those assets to a trust,
which in turn issues to third-party investors certificates or notes
(securities) collateralized by the transferred assets. The proceeds
from issuance are distributed to the Company, through its
wholly owned subsidiaries, as consideration for the transferred
assets.
The receivables and loans being securitized are reported as
assets on the Company’s Consolidated Balance Sheets and the
related securities issued to third-party investors are reported as
long-term debt.
Under the respective terms of the securitization trust
agreements, the occurrence of certain triggering events
associated with the performance of the assets of each trust could
result in payment of trust expenses, establishment of reserve
funds, or in a worst-case scenario, early amortization of investor
certificates. During the year ended December 31, 2012, no such
triggering events occurred.
The ability of issuers of asset-backed securities relating to
cardmember receivables and loans of an originating bank to
obtain necessary credit ratings for their issuances has historically
been based, in part, on qualification under the FDIC’s safe
harbor rule for assets transferred in securitizations. In 2009 and
2010, the FDIC issued a series of changes to its safe harbor rule,
including a final rule for securitization safe harbor, issued in
2010, requiring issuers to comply with a new set of requirements
in order to qualify for the safe harbor protection. Issuances out of
the Lending Trust are grandfathered under the new FDIC final
rule. There are two trusts for the Company’s cardmember charge
card receivable securitization, the American Express Issuance
Trust (the Charge Trust) and the American Express Issuance
Trust II (the Charge Trust II). The Charge Trust does not satisfy
the criteria required to be covered by the FDIC’s new safe harbor
rule, nor did it meet the requirements to be covered by the safe
harbor rule existing prior to 2009. It was structured, and
continues to be structured, so that the financial assets transferred
to the Charge Trust would not be deemed to be property of the
originating banks in the event the FDIC is appointed as a receiver
or conservator of the originating banks. The Charge Trust II,
which was formed in October 2012, was designed to satisfy the
criteria to be covered by the FDIC’s new safe harbor rule.
LIQUIDITY MANAGEMENT
The Company’s liquidity objective is to maintain access to a
diverse set of cash, readily marketable securities and contingent
sources of liquidity, so that the Company can continuously meet
expected future financing obligations and business requirements
for at least a 12-month period, even in the event it is unable to
raise new funds under its regular funding programs. The
Company has in place a Liquidity Risk Policy that sets out the
Company’s approach to managing liquidity risk on an
enterprise-wide basis.
The Company incurs and accepts liquidity risk arising in the
normal course of offering its products and services. The liquidity
risks that the Company is exposed to can arise from a variety of
sources, and thus its liquidity management strategy includes a
variety of parameters, assessments and guidelines, including, but
not limited to:
폷Maintaining a diversified set of funding sources (refer to
Funding Strategy section for more details);
폷Maintaining unencumbered liquid assets and off-balance sheet
liquidity sources; and
폷Projecting cash inflows and outflows from a variety of sources
and under a variety of scenarios, including contingent liquidity
exposures such as unused cardmember lines of credit and
collateral requirements for derivative transactions.
The Company’s current liquidity target is to have adequate
liquidity in the form of excess cash and readily marketable
securities that are easily convertible into cash to satisfy all
maturing long-term funding obligations for a 12-month period.
In addition to its cash and readily marketable securities, the
Company maintains a variety of contingent liquidity resources,
such as access to undrawn amounts under its secured financing
facilities and the Federal Reserve discount window as well as
committed bank credit facilities.
As of December 31, 2012, the Company’s excess cash available to
fund long-term maturities was as follows:
(Billions) Total
Cash $ 15.8(a)
Securities held as collateral 0.3(b)
Cash available to fund maturities $ 16.1
(a) Includes $22.3 billion classified as cash and cash equivalents, less $6.5 billion
of cash available to fund day-to-day operations. The $15.8 billion represents
cash residing in the United States.
(b) Off-balance sheet securities held as collateral from a counterparty that had
not been sold or repledged.
The upcoming approximate maturities of the Company’s long-
term unsecured debt, debt issued in connection with asset-
backed securitizations and long-term certificates of deposit are as
follows:
(Billions) Debt Maturities
2013 Quarters Ending:
Unsecured
Debt
Asset-Backed
Securitizations
Certificates
of Deposit Total
March 31 $ — $ — $ 0.8 $ 0.8
June 30 4.5 0.9 0.9 6.3
September 30 3.1 2.0 0.6 5.7
December 31 — 1.2 2.6 3.8
Total $ 7.6 $ 4.1 $ 4.9 $ 16.6
The Company’s financing needs for the next 12 months are
expected to arise from these debt and deposit maturities as well
as changes in business needs, including changes in outstanding
cardmember loans and receivables and acquisition activities.
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