Item 1.
BUSINESS
Introduction
American Express Credit Corporation (Credco) was incorporated in Delaware in 1962 and was acquired by American Express Company (American Express) in December 1965. On January 1, 1983, Credco became a wholly-owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), a wholly-owned subsidiary of American Express. Both American Express and TRS are bank holding companies.
Credco is primarily engaged in the business of financing non-interest-bearing cardmember receivables arising from the use of the American Expressâ Card, the American Expressâ Gold Card, Platinum Cardâ, Corporate Card and other American Express Cards issued in the United States, and in designated currencies outside the United States. Credco also purchases certain interest-bearing and discounted revolving loans comprised of American Express credit cards and Sign & Travelâ, although interest-bearing and revolving loans are primarily funded by subsidiaries of TRS other than Credco. American Express charge cards and American Express credit cards are collectively referred to herein as the Card.
American Express Card Business
American Express is a world leader in providing charge and credit cards to consumers, small businesses and corporations. These cards include cards issued by American Express as well as cards issued by third-party banks and other institutions that are accepted on the American Express network. American Express’ cards permit its cardmembers to charge purchases of goods and services in most countries around the world at the millions of merchants that accept Cards bearing American Express’ logo.
American Express’ various products and services are sold globally to diverse customer groups, including consumers, small businesses, middle-market companies, and large corporations. As a merchant processor, TRS accepts and processes from each participating establishment the charges arising from cardmember purchases. TRS charges a fee, the “merchant discount,” to the merchant that is principally determined by the value that is delivered to the service establishment and generally represents a premium over other card networks. Value is delivered to the service establishment through higher spending cardmembers relative to users of cards issued on competing card networks, marketing expertise and the cardmembers’ insistence on using their cards when enrolled in rewards or other card loyalty programs, including cardmembers who are part of American Express’ Corporate Card program. When establishing the discount rate, consideration is also given to a number of other factors, such as industry specific requirements, estimated charge volume and payment terms.
The charge card, which is marketed in the United States and many other countries and carries no preset spending limit, is primarily designed as a method of payment and not as a means of financing purchases of goods or services. Charges are approved based on a variety of factors, including a cardmember’s current spending patterns, payment history, credit record and financial resources. Charge cards generally require payment by the cardmember of the full amount billed each month, and no finance charges are assessed on the balance. Charge card accounts that are past due are subject, in most cases, to a delinquency assessment and, if not brought to current status, may be cancelled. The no preset-spending limit and pay-in-full nature of these products attract high-spending cardmembers who want to use a charge card to facilitate larger payments. TRS and its licensees also offer a variety of revolving credit cards marketed in the United States and other countries. These cards have a range of payment terms, grace periods, and rate and fee structures.
The American Express card businesses are subject to extensive regulations in the United States, as well as in foreign jurisdictions. In the United States, the business is subject to a number of federal laws and regulations, including:
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the Equal Credit Opportunity Act (which generally prohibits discrimination in the granting and handling
of credit);
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the Fair Credit Reporting Act (FCRA) as amended by the Fair and Accurate Credit Transactions Act (FACT Act) (which, among other things, regulates use by creditors of consumer credit reports and credit prescreening practices and requires certain disclosures when an application for credit is rejected);
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the Truth in Lending Act (TILA) (which, among other things, requires extensive disclosure of the terms upon which credit is granted), including the amendments to TILA that were adopted through the enactment of the Fair Credit and Charge Card Disclosure Act (which mandates certain disclosures on credit and charge card applications);
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the Fair Credit Billing Act (which, among other things, regulates the manner in which billing inquiries are handled and specifies certain billing requirements);
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the Electronic Funds Transfer Act (which regulates disclosures and settlement of transactions for electronic funds transfers including those at ATMs);
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the final rules recently issued by the Federal Reserve amending Regulation AA (i.e., UDAP) (which prohibits certain acts or practices in connection with consumer credit card accounts) and Regulation Z (which substantially revises the open-end credit provisions of Regulation Z); and
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federal and state laws and regulations that generally prohibit engaging in unfair and deceptive business practices.
Certain federal privacy-related laws and regulations govern the collection and use of customer information by financial institutions. Federal legislation also regulates abusive debt collection practices. In addition, a number of states, the European Union and many foreign countries in which American Express operates have significant consumer credit protection, disclosure and privacy-related laws (in certain cases more stringent than the laws in the United States). The application of bankruptcy and debtor relief laws affect Credco to the extent that such laws result in amounts owed being classified as delinquent and/or charged-off as uncollectible. Card issuers and card networks are subject to certain provisions of the Bank Secrecy Act as amended by the Patriot Act, with regard to maintaining effective anti-money laundering programs.
General Nature of Credco’s Business
Credco generally purchases certain cardmember receivables and cardmember loans arising from the use of the card throughout the world pursuant to agreements (the Receivables Agreements) with TRS and certain of its subsidiaries that issue the card (Card Issuers). Net income primarily depends on the volume of receivables arising from the use of the card purchased by Credco, the discount rates applicable thereto, the relationship of total discount to Credco’s interest expense and the collectibility of the receivables purchased. The average life and collectibility of accounts receivable generated by the use of the card are affected by factors such as general economic conditions, overall levels of consumer debt and the number of new cards issued.
In October 2008, American Express moved to increase its flexibility in funding U.S. consumer and small business charge card receivables by amending the Receivables Agreements between Credco and each of American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (FSB), (together, the Banks). The previous agreements called for the Banks, which issue American Express’ U.S. consumer and small business charge cards, to sell all unsecuritized receivables related to spending on those cards to Credco. The amended agreements will give the Banks the flexibility to continue to sell the receivables to Credco or to retain the receivables and fund them from their own sources. These amendments will allow American Express to shift, from time-to-time, the funding of those receivables from Credco to the Banks. Credco has traditionally financed the purchase of receivables principally through the issuance of commercial paper, including issuance to the Commercial Paper Funding Facility (CPFF), discussed further below, as well as through the sale of medium- and long-term debt notes. However, Credco can transfer proceeds of its funding activities in excess of its needs broadly to other subsidiaries of American Express, including to the Banks. The new arrangements between Credco and the Banks will have no impact on Credco’s funding of U.S. corporate charge card receivables and charge card receivables outside the United States.
Credco believes the above changes will lead to a material reduction of purchases of cardmember receivables.
However, it is not expected that these reductions will have a material impact on its fixed charge coverage ratio. For additional discussion on the fixed charge ratio, refer to page 26 below.
Credco generally purchases cardmember receivables and loans without recourse. Amounts resulting from unauthorized charges (for example, those made with a lost or stolen card) are excluded from the definition of receivables and loans under the Receivables Agreements and are not eligible for purchase by Credco. If the unauthorized nature of the charge is discovered after purchase by Credco, the Card Issuer repurchases the charge from Credco.
Credco generally purchases non-interest and interest-bearing cardmember receivables at face amount less a specified discount, which is determined at the time of purchase based upon the nature of the receivables. The discount rate applicable to purchases of new receivables is negotiated to reflect the changes in money market interest rates or significant changes in the collectibility of the receivables. New groups of cardmember receivables are generally purchased net of reserve balances.
Cardmember loans are primarily funded by subsidiaries of TRS other than Credco, although certain cardmember loans are purchased by Credco. These cardmember loans consist of certain interest-bearing and discounted revolving loans comprised of American Express credit card and Sign & Travelâ receivables.
As part of its receivables funding activities, Credco regularly reviews funding sources and strategies in international markets. Credco funds cardmember receivables and cardmember loans in Canada primarily through loans to Amex Bank of Canada, the card issuer and a wholly-owned subsidiary of TRS, rather than through the purchase of receivables without recourse. In Australia, the United Kingdom and Mexico, Credco funds cardmember receivables and cardmember loans by acquiring such receivables and loans with recourse from the local card issuers, which are wholly-owned subsidiaries of TRS. These local funding strategies result in Credco recording additional loans to affiliates.
In conjunction with TRS’ securitization program, Credco, through its wholly-owned subsidiary, Credco Receivables Corporation (CRC), purchased participation interests from American Express Receivables Financing Corporation V LLC (RFC V), which is consolidated by TRS. The participation interests purchased represented the undivided interests in cardmember receivables transferred to the American Express Issuance Trust (AEIT) by TRS. TRS and its subsidiaries originated the receivables. AEIT is a non-qualifying special purpose entity that is consolidated by RFC V.
A subsidiary of TRS, as agent for Credco, underwrites the cardmember receivables and loans and thus establishes credit standards for cardmembers on Credco’s behalf. In addition, the subsidiary of TRS performs accounting, clerical and other services necessary to bill and collect all cardmember receivables and loans owned by Credco. The Receivables Agreements provide that, without prior written notice to Credco, the credit standards used to determine whether a card is to be issued to an applicant may not be materially reduced and the policy as to the cancellation of cards for credit reasons may not be materially liberalized.
American Express, as the parent of TRS, has agreed with Credco that it will take all necessary steps to assure performance of certain TRS obligations under the Receivables Agreements between TRS and Credco. The Receivables Agreements may be terminated at any time by the parties thereto, generally upon little or no notice. The obligations of Credco are not guaranteed under the Receivables Agreements or otherwise by American Express or the Card Issuers.
Current Economic Environment/Outlook
During the latter half of 2008, concerns over the availability and cost of credit, a historic decline in real estate
values in the United States, rising unemployment, and the collapse of major financial institutions contributed to a worsening global recession, increased volatility and reduced liquidity in the capital markets, and diminished expectations for the economy. American Express experienced slowing cardmember spending (including a year over year decline in spending in the fourth quarter of the year) and loan volumes and higher delinquencies as increasing stress in the worldwide financial markets eroded consumer and business confidence levels. Based on these trends, American Express expects consumer and business sentiment will likely deteriorate further and will translate into weaker economies around the globe and increased unemployment through 2009, which may result in declines in credit and charge card usage. If this occurs, the impact on Credco is likely to be a reduction in purchases of cardmember receivables and loans.
As further discussed in the Funding section below, since late September 2008, the market for unsecured term debt generally has been unavailable to all financial institutions, including Credco. However, Credco has continued to issue commercial paper. Its commercial paper issuances have occurred in similar daily average amounts and comparable rates but at shorter weighted average maturities than Credco’s historical trend. Credco’s shorter maturities are consistent with the changes in issuance maturities occurring across the overall commercial paper market, as reported by the Federal Reserve Board (the Board). The shortening of the maturities in the commercial paper funding markets makes it more difficult for Credco to manage its day-to-day cash flow.
On October 7, 2008, the Board announced the creation of the CPFF. The CPFF provides three month liquidity to U.S. issuers of commercial paper through a special purpose vehicle (SPV), which purchases three month unsecured and asset-backed commercial paper directly from eligible issuers using financing provided by the Federal Reserve Bank of New York. The commercial paper must be rated at least A1/P1/F1 by a major nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, must be rated at least A1/P1/F1/R1 (middle) by two or more NRSROs. Credco is eligible to have up to $14.7 billion of commercial paper outstanding with the SPV at any one time. The SPV is currently scheduled to cease purchasing commercial paper on October 30, 2009, unless the Board extends the facility. At December 31, 2008, Credco had $7.3 billion of commercial paper outstanding, including $4.5 billion under the CPFF, as further discussed in the Consolidated Liquidity and Capital Resources section. As of March 30, 2009, there was no commercial paper outstanding under the CPFF.
Volume of Business
The following table shows the volume of all cardmember receivables and cardmember loans purchased by Credco during each of the years indicated, together with cardmember receivables and cardmember loans owned by Credco at the end of such years (billions):
The reduction in volumes of receivables and loans purchased during 2008 and receivables and loans owned at December 31, 2008, compared to prior periods is primarily due to the amendment to the Receivables Agreements in October 2008, as discussed previously, and to a lesser extent to a reduction in purchases resulting from lower cardmember spending in the fourth quarter of 2008 compared to the same period a year ago.
Cardmember Receivables
At December 31, 2008 and 2007, Credco owned $10.9 billion and $26.3 billion of cardmember receivables, respectively. Cardmember receivables represent amounts due from charge card customers and are recorded at the time they are purchased from the seller. Included in cardmember receivables are Credco Receivables Corporation (CRC)’s purchases of the participation interests from American Express Receivables Financing Corporation V LLC (RFC V) in conjunction with TRS’ securitization program. At December 31, 2008 and 2007, CRC owned approximately $2.4 billion and $5.7 billion, respectively, of participation interests purchased from RFC V.
The following table summarizes selected information related to the cardmember receivables portfolio:
(a) In the fourth quarter of 2008, American Express revised the time period in which past due cardmember receivables for its U.S. Card Services segment are written off to 180 days past due, consistent with applicable bank regulatory guidance. Previously, receivables were written off when 360 days past due. Credco’s receivables subject to 180 day write-off and the related net write-off rate, which reflects write-offs, net of recoveries expressed as a percentage of the average amount of cardmember receivables owned by Credco at the beginning of the year and at the end of each month in each of the years indicated, are reflected above, and includes $257 million of net write-offs as result of the methodology change. See further discussion in Notes 1 and 2 of the Consolidated Financial Statements.
(b) Represents the average life of cardmember receivables owned by Credco, based upon the ratio of the average amount of both billed and unbilled receivables owned by Credco at the end of each month, during the years indicated, to the volume of cardmember receivables purchased by Credco.
(c) Credco’s write-offs, net of recoveries, expressed as a percentage of the volume of cardmember receivables purchased by Credco in each of the years indicated.
Cardmember receivables owned at December 31, 2008, decreased approximately $15.5 billion from December 31, 2007, primarily as a result of a reduction of cardmember receivables purchased due to the amendment to the Receivables Agreements.
Reserves for Cardmember Receivables and Cardmember Loans
The following table presents the changes in the reserve for losses related to cardmember receivables and loans:
(a)
Includes recoveries on accounts previously written-off of $144 million, $175 million, and $158 million in 2008, 2007 and 2006, respectively.
(b)
Reserve balances applicable to new groups of cardmember receivables and loans purchased from TRS and certain of its subsidiaries and participation interests purchased from affiliates.
(c)
The net write-offs for 2008 include approximately $257 million resulting from the 180 day write-off methodology change discussed previously.
(d)
Primarily relates to reserve balances applicable to certain groups of cardmember receivables and participation interests sold to affiliates.
Loans to Affiliates
Credco’s loans to affiliates represent fixed and floating rate interest-bearing intercompany borrowings by other wholly-owned TRS subsidiaries and American Express.
The components of loans to affiliates at December 31 were as follows:
(a) In April 2008, Credco amended the funding structure with Germany from a transfer of receivables with recourse to a purchase of cardmember receivables without recourse, thereby reducing the loans to American Express Services Europe Limited by approximately $675 million.
(b) During 2008, Credco loaned $2.2 billion to Centurion Bank as a consequence of the amendment to the Receivables Agreements, discussed previously. In February 2009, Centurion Bank repaid $2.2 billion to Credco.
(c) During 2008, Credco loaned $317 million to American Express Bank (Mexico) S.A.
(d) Of the $11.7 billion outstanding of loans to affiliates, approximately $6.0 billion are collateralized by the underlying cardmember receivables transferred with recourse.
Due from Affiliates
At December 31, 2008 and 2007, due from affiliates was $3.7 billion and $2.4 billion, respectively. These amounts relate primarily to a timing difference resulting from the purchase of cardmember receivables net of
remittances from TRS, which are settled in the subsequent month in the normal course of business.
Short-term Debt to Affiliates
Components of short-term debt to affiliates at December 31 were as follows:
Short-term debt to affiliates consists primarily of master note agreements for which there is no stated term. Credco does not expect any changes to its short-term funding strategies with affiliates.
Sources of Funds
Credco’s business is financed by short-term borrowings consisting principally of commercial paper, borrowings under bank credit facilities in certain international markets, and issuances of U.S. and non-U.S. dollar short-term and long-term borrowings, as well as through operations and intercompany borrowings. Historically, short-term borrowings consisted of commercial paper. Since September 2008, Credco’s reliance on commercial paper as a funding source has diminished considerably. This short-term source has not been replaced with other types of short-term debt as Credco’s funding needs have decreased because of the reduction of receivable purchases due to the amendment to the Receivables Agreements discussed previously, and to a lesser extent to a reduction in purchases resulting from lower cardmember spending in the fourth quarter of 2008 compared to the same period a year ago. The weighted average interest rates on an annual basis of all borrowings, after giving effect to commitment fees under lines of credit and the impact of interest rate swaps, during the following years were:
See Notes 4 and 5 to the Consolidated Financial Statements for additional information about Credco’s short-term and long-term debt, including lines of credit.
Foreign Operations
See Notes 1, 7 and 13 to the Consolidated Financial Statements for information about Credco’s foreign exchange translation and operations in different geographic regions.
Employees
At December 31, 2008 and 2007, Credco had 22 and 23 employees, respectively.
Item 1A.
Item 1A.
RISK FACTORS
Based on the information currently known Credco believes that the matters discussed below identify the most significant risk factors affecting Credco. However, the risks and uncertainties that Credco faces are not limited to those described below. Additional risks and uncertainties not presently known to Credco or that Credco currently believes to be immaterial may also adversely affect Credco’s business and the trading price of its securities.
Adverse capital and credit market conditions may significantly affect Credco’s ability to meet liquidity needs, access to capital and cost of capital.
The money and capital markets have been experiencing extreme volatility and disruption since August 2007, which have negatively impacted market liquidity conditions. In recent months, the volatility and disruption have reached unprecedented levels.
The concerns on the part of market participants have focused on a broad range of mortgage- and asset-backed and other fixed income securities, including those rated investment grade, the U.S. and international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events and increased probability of default. Securities that are less liquid are more difficult to value and may be hard to dispose of. Domestic and international equity markets have also been experiencing heightened volatility and turmoil, with issuers (such as Credco) that have exposure to or rely on the credit markets particularly affected.
Credco relies on liquidity to pay operating expenses, interest on debt and dividends on capital stock and to repay maturing liabilities. Without sufficient liquidity, Credco could be forced to limit its business growth or curtail operations. The principal sources of Credco’s liquidity are payments from cardmembers, cash flow from its investment portfolio and assets, consisting mainly of cash or assets that are readily convertible into cash, and issuances of commercial paper. Sources of liquidity in normal markets also include a variety of short-and long-term instruments, including medium- and long-term unsecured debt.
Notwithstanding Credco’s solid financial position, Credco is not immune from the pressures brought on by the current crisis in the financial markets. The fragility of the credit markets and the current economic environment have impacted financial term services companies through market volatility and fluctuations, loss of confidence and rating agency actions. Since September 2008, the market for Credco term unsecured debt, like that for virtually all financial institutions, has been effectively frozen. Therefore, Credco’s ability to obtain financing in the debt capital markets for unsecured term debt is dependent on a renewal of investor demand.
In the event current sources of liquidity, including internal sources, do not satisfy Credco’s needs, it could be required to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, Credco’s long-term debt credit ratings, which were downgraded in 2008 by two of the major rating agencies, and credit capacity. Additionally, it is possible that lenders could develop a negative perception of Credco’s long- or short-term financial prospects if it incurs large credit losses or if the level of its business activity decreased due to an economic downturn. Similarly, Credco’s access to funds may be impaired if regulatory authorities or rating agencies take negative actions against Credco. In addition, the CPFF being made available through the Federal Reserve Bank of New York, is subject to Credco’s ability to meet or continue to meet the criteria for participation in such program and is temporary in nature as such program is scheduled to terminate during 2009.
Disruptions, uncertainty or volatility in the capital and credit markets may also limit Credco’s access to
capital required to operate its business. Such market conditions may limit its ability to replace, in a timely manner, maturing liabilities, satisfy regulatory capital requirements and access the capital necessary to grow its business. As such, Credco may be forced to delay raising capital, issue shorter-tenured securities than it prefers, or bear an unattractive cost of capital, which could decrease profitability and significantly reduce financial flexibility.
If current levels of market disruption and volatility continue or worsen, there can be no assurance that Credco will not experience an adverse effect, which may be material, on Credco’s ability to access capital and on its business, financial condition and results of operations.
Difficult conditions in the global capital markets and the economy generally may materially adversely affect Credco’s business and results of operations, and Credco does not expect these conditions to improve in the near future.
Credco’s results of operations are materially affected by conditions in the global capital markets and the economy in general, both in the United States and elsewhere. The stress experienced by global capital markets that began in the second half of 2007 continued and substantially increased during 2008, and Credco does not expect these conditions to improve in the near future.
Recently, concerns over the availability and cost of credit, the U.S. mortgage market, a declining real estate market in the United States (in particular, in those markets in which American Express has generated significant spend volume on its charge and credit card products) and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and the markets going forward. These factors, combined with declining business and consumer confidence and increased unemployment and volatile oil prices, have precipitated a global recession, which may cause further declines in credit and charge card usage and has already resulted in adverse changes in payment patterns, causing increases in delinquencies and default rates. If the performance of its charge card and credit card portfolios continues to weaken through increasing delinquencies and write-offs, American Express’ and Credco’s long-term and short-term debt ratings could be downgraded and Credco’s access to capital could be materially adversely affected and cost of capital could increase.
These events and the continuing market upheavals may have an adverse effect on Credco, in part because it is dependent upon consumer and business behavior. Credco’s revenue growth is likely to decline in such circumstances and, in certain instances, revenues may decrease, and its profit margins could erode. In addition, in the event of extreme prolonged market adversity, such as the global credit crisis and economic slowdown, Credco could incur significant losses.
The lack of available credit, lack of confidence in the financial markets, reduced consumer and business spending, and worsening credit metrics also pose other risks to Credco’s results of operations and financial condition. In particular, Credco may face the following risks, among others, in connection with these events:
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The processes Credco uses to estimate losses may no longer be reliable because they rely on complex judgments, including forecasts of economic conditions, that may no longer be capable of accurate estimation.
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American Express’ ability to assess the creditworthiness of its customers may be impaired if the models and approaches it uses to select, manage, and underwrite credit to its customers become less predictive of future write-offs.
Political or economic instability in certain regions or countries could also affect American Express’ commercial or other lending activities, among other businesses, or result in restrictions on convertibility of certain currencies.
Terrorist attacks, natural disasters or other catastrophic events may have a negative effect on Credco’s business and infrastructure, including its information technology systems. Because Credco derives a portion of its revenues from travel-related spending, its business will be sensitive to safety concerns, and thus may decline during periods in which travelers become concerned about safety issues or when travel might involve health-related risks.
As the conditions described above (or similar ones) persist or worsen, Credco could experience continuing or increased adverse effects on its results of operations and financial condition.
The impairment of other financial institutions could adversely affect Credco.
Credco’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial services institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. Credco routinely executes transactions with counterparties in the financial services industry, including commercial banks, investment banks and insurance companies. Defaults or non-performance by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by one or more of Credco’s counterparties, which, in turn, could have a material adverse effect on Credco’s results of operations and financial condition.
Any reduction in Credco’s credit ratings could increase the cost of its funding from and restrict Credco’s access to the capital markets and have a material adverse effect on Credco’s results of operations and financial condition.
Although Credco’s long-term debt is currently rated investment grade (at “A” levels) by the major rating agencies, the ratings of that debt have been downgraded during the fourth quarter of 2008 by Moody’s Investors Services (Moody’s) and Standard & Poor’s (S&P), two of the major rating agencies. In addition, recently both rating agencies have announced that they are reviewing Credco’s ratings with a view to a possible further downgrade. S&P is reviewing both long- and short-term ratings; Moody’s affirmed the current short-term rating and is reviewing the long-term rating only. The rating agencies regularly evaluate Credco, and their ratings of Credco’s long-term and short-term debt are based on a number of factors, including Credco’s financial strength as well as factors not entirely within Credco’s control, including conditions affecting the financial services industry generally. In light of the difficulties in the financial services industry and the financial markets, there can be no assurance that Credco will maintain its current credit ratings. Failure to maintain those ratings could, among other things, adversely limit Credco’s access to the capital markets and adversely affect the cost and other terms upon which Credco is able to obtain funding and increase Credco’s cost of capital.
In addition, a downgrade of the short-term ratings of Credco below its current P-1/A-1/F1 ratings by two or more rating agencies would cause Credco to be unable to participate in the CPFF established by the Federal Reserve Bank of New York, which would have a material adverse effect on Credco’s liquidity and its ability to fund charge card receivables and credit card loans.
Credco cannot predict what actions rating agencies may take. As with other companies in the financial services industry, Credco’s ratings could be downgraded at any time and without any notice by any of the rating agencies.
Adverse currency fluctuations and foreign exchange controls could decrease revenue Credco receives from its international operations.
Credco generates a portion of its revenue from activities outside the United States. Credco is exposed to foreign exchange risk from its international operations, and some of the revenue it generates outside the United States is subject to unpredictable and indeterminate fluctuations if the values of other currencies change relative to the U.S. dollar. Resulting exchange gains and losses are included in Credco’s net income. Furthermore, Credco may become subject to exchange control regulations that might restrict or prohibit the conversion of Credco’s other revenue currencies into U.S. dollars. The occurrence of any of these events or circumstances could decrease the revenues Credco receives from its international operations and have a material adverse effect on Credco’s business.
The risk management policies and procedures of Credco and the Card Issuers may not be effective.
Credco must effectively manage credit risk related to consumer debt, business loans, merchant bankruptcies, the rate of bankruptcies, and other credit trends which can affect spending on card products, debt payments by individual and corporate customers and businesses that accept American Express card products.
Credit risk is the risk of loss from obligor or counterparty default. Credco is exposed to credit risk through the cardmember receivables and cardmember loans it purchases generally without recourse as well as through its participation interests. Third parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Country, regional and political risks are components of credit risk. Rising delinquencies and rising rates of bankruptcy are often precursors of future write-offs and may require Credco to increase its reserve for losses. Higher write-off rates and an increase in Credco’s reserve for losses adversely affect Credco’s profitability and may increase Credco’s cost of funds.
Although Credco and the Card Issuers make estimates to provide for credit losses in their respective outstanding portfolio of loans and receivables, these estimates may not be accurate. In addition, the information that Credco and the Card Issuers use in managing their credit risk may be inaccurate or incomplete. Although Credco regularly reviews its and the Card Issuers’ credit exposure to specific clients and counterparties and to specific industries, countries and regions that Credco and the Card Issuers believe may present credit concerns, default risk may arise from events or circumstances that are difficult to foresee or detect, such as fraud. Credco and the Card Issuers may also fail to receive full information with respect to the credit risks of customers.
Credco must also effectively manage market risk to which it is exposed. Market risk is the risk to earnings or value resulting from movements in market prices. Credco is exposed to market risk from interest rates in Credco’s Card business and in its investment portfolios. Changes in the interest rates at which Credco borrows and lends money affect the value of Credco’s assets and liabilities. If the rate of interest Credco pays on its borrowings increases more than the discount rate Credco earns on purchases of receivables and the rate of interest Credco earns on its loans, its net interest yield, and consequently Credco’s net income, could fall.
Credco must also accurately estimate the fair value of the assets in its investment portfolio and, in particular, those investments that are not readily marketable.
Additionally, Credco must also effectively manage liquidity risk to which it is exposed. Liquidity risk is defined as the inability to access cash and equivalents needed to meet business requirements and satisfy Credco’s obligations. If Credco is unsuccessful in managing its liquidity risk, Credco may maintain too much liquidity, which can be costly and limit financial flexibility, or Credco may be too illiquid, which could result in financial distress during a liquidity event. For additional information regarding Credco management of liquidity risk, see “Adverse capital and credit market conditions may significantly affect Credco’s ability to meet liquidity needs, access to capital and cost of capital” above.
Finally, Credco must also manage the operational risks to which it is exposed. Credco considers operational risk to be the risk of not achieving business objectives due to inadequate or failed processes or information systems, human error, or the external environment, such as natural disasters. Operational risks include the risk
that Credco may not comply with specific regulatory or legal requirements, exposing Credco to fines and/or penalties and possibly brand damage; employee error or intentional misconduct that results in a material financial misstatement; or a failure to monitor an outsource partner’s compliance with a service level agreement, resulting in economic harm to Credco.
Although Credco and the Card Issuers have devoted significant resources to develop their risk management policies and procedures and expect to continue to do so in the future, Credco’s risk management techniques and hedging strategies may not be fully effective. See Item 7A “Quantitative and Qualitative Disclosures About Market Risk” for a discussion of the policies and procedures Credco uses to identify, monitor and manage the risks Credco assumes in conducting its businesses. Management of credit, market and operational risk requires, among other things, policies and procedures to record properly and verify a large number of transactions and events, and these policies and procedures may not be fully effective.
Credco and its subsidiaries are dependent on the Card Issuers that generate receivables.
Credco and its subsidiaries are dependent on the Card Issuers that generate receivables. Credco and American Express Overseas Credit Corporation Limited (AEOCC), a wholly-owned subsidiary of Credco, are parties to asset sale and purchase agreements relating to the purchase of receivables from the Card Issuers. These receivables agreements generally require that non-interest and interest-bearing receivables be purchased at discount rates that are negotiated and determined at the time of purchase based upon the nature of the receivables. Credco and AEOCC are dependent upon these contractual arrangements. Lower levels of cardmember receivables and loans generated by the Card Issuers from which Credco and AEOCC purchase receivables would result in a reduction in the level of finance operations and a reduction in revenues of Credco and AEOCC. American Express and TRS’ operations are independently subject to a variety of risk factors. The outstanding debt and other securities of Credco and AEOCC are not obligations of American Express, TRS or its other subsidiaries.
Other Reporting Matters
Accounting Developments
See the Recently Issued Accounting Standards section of Note 1 to the Consolidated Financial Statements.
Forward-looking Statements
Various statements have been made in this Annual Report on Form 10-K that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in Credco’s other reports filed with or furnished to the SEC and in other documents. In addition, from time to time, Credco, through its management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified above and below, which could cause actual results to differ materially from such statements. The words “believe,” “expect,” “anticipate,” “optimistic,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely” and similar expressions are intended to identify forward-looking statements. Credco cautions you that the risk factors described above and below are not exclusive. There may also be other risks that Credco is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Credco undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from Credco’s forward-looking statements include, but are not limited to:
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credit trends, which will depend in part on the economic environment, including, among other things, the housing market and the rates of bankruptcies, which can affect spending on card products and
debt payments by individual and corporate customers;
•
Credco’s ability to accurately estimate the provisions for losses in Credco’s outstanding portfolio of cardmember receivables and loans;
•
fluctuations in foreign currency exchange rates;
•
negative changes in Credco’s credit ratings, which could result in decreased liquidity and higher borrowing costs;
•
changes in laws or government regulations affecting American Express’ business, including the potential impact of regulations adopted by federal bank regulators relating to certain credit and charge card practices;
•
the effect of fluctuating interest rates, which could affect Credco’s borrowing costs;
•
the impact on American Express’ business resulting from continuing geopolitical uncertainty;
•
Credco’s ability to satisfy its liquidity needs and execute on its funding plans, which will depend on, among other things, Credco’s future business growth, its credit ratings, market capacity and demand for securities offered by Credco, performance by Credco’s counterparties under its bank credit facilities and other lending facilities, and regulatory changes, including changes to the policies, rules and regulations of the Board of Governors of the Federal Reserve System;
•
Credco’s ability to meet the criteria for participation in the Commercial Paper Funding Facility being made available through the Federal Reserve Bank of New York; and
•
Credco’s ability to access in a timely manner its remaining investment in the Reserve Primary Fund.
Item 1B.
Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Item 2.
Item 2.
PROPERTIES
Credco neither owns nor leases any material physical properties.
Item 3.
Item 3.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Credco or its subsidiaries is a party or of which any of their property is the subject. Credco knows of no such proceedings being contemplated by government authorities or other parties.
Item 4.
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I(2)(c) to Form 10-K.
PART II
Item 5.
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
American Express, through its wholly-owned subsidiary, TRS, owns all of the outstanding common stock of Credco. Therefore, there is no market for Credco’s common stock.
Credco paid cash dividends of $580 million and $750 million to TRS in 2008 and 2007, respectively. On February 10, 2009, Credco paid a cash dividend of $75 million to TRS. For information about limitations on Credco’s ability to pay dividends, see Note 6 to the Consolidated Financial Statements.
Item 6.
Item 6.
SELECTED FINANCIAL DATA
The following summary of certain consolidated financial information of Credco was derived from audited financial statements for the five years ended December 31:
Item 7.
Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Critical Accounting Policies
American Express Credit Corporation’s (Credco) significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The following provides information about three critical accounting policies that are important to the Consolidated Financial Statements and that require significant management assumptions and judgments.
Reserves for cardmember losses
Credco’s reserves for losses relating to cardmember receivables and loans represent management’s best estimate of the losses inherent in Credco’s outstanding portfolio of receivables and loans. Reserves for these losses are primarily based upon models that analyze specific portfolio statistics, including average write-off rates for various stages of receivable aging (i.e., current, 30 days, 60 days, 90 days) over a 24-month period and average bankruptcy and recovery rates. These reserves reflect management’s judgment regarding overall adequacy. Management considers whether to adjust reserves that are calculated by the analytic models based on other trends, such as the reserves as a percentage of past-due accounts, reserves as a percentage of cardmember loans and receivables, and net write-off coverage. Other trends considered include leading economic and market indicators, such as the unemployment rate, the consumer confidence index, the purchasing manager’s index, bankruptcy filings, concentration of credit risk based on tenure, industry or geographic regions, and the legal and regulatory environment.
Cardmember loans are generally written-off when they are 180 days past due. Cardmember receivables are generally written-off when they are 360 days past due, except that beginning in 2008, cardmember receivables that are included in American Express’ U.S. Card Services segment are written-off when they are 180 days past due. Such receivables are related to Credco Receivables Corporation (CRC). To the extent historical credit experience updated for emerging market trends in credit are not indicative of future performance, actual losses could differ significantly from management’s judgments and expectations, resulting in either higher or lower future provisions for losses, as applicable. As of December 31, 2008, if an increase in write-off rates was five percent of cardmember receivables and loans at such date, the reserve for losses would increase by approximately $11 million. This sensitivity analysis does not represent management’s expectations of the deterioration in write-offs but is provided as a hypothetical scenario to assess the sensitivity of the provisions for cardmember losses to changes in key inputs.
The process for determining the reserve for cardmember losses requires a high degree of judgment. It is possible that others, given the same information, may at any point in time reach different reasonable conclusions.
Fair Value Measurement
Credco holds investment securities and derivative instruments. These financial instruments are reflected at fair value on Credco’s Consolidated Balance Sheets. Management will make significant assumptions and judgments when estimating fair value for these financial instruments.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (SFAS No. 157), the objective of a fair value measurement is to determine the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). SFAS No. 157 established a three-level hierarchy of valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to the measurement of fair value based on unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), followed by the
measurement of fair value based on pricing models with significant observable inputs (Level 2), with the lowest priority given to the measurement of fair value based on pricing models with significant unobservable inputs (Level 3).
Effective January 1, 2008, Credco partially adopted SFAS No. 157 for its financial assets and liabilities that are accounted for at fair value. Refer to Notes 1 and 10 to the Consolidated Financial Statements for further details of Credco’s fair value measurements.
Investment Securities
Credco’s investment securities are comprised of predominantly U.S. Government and U.S. Government sponsored entities (e.g., Fannie Mae, Freddie Mac). The investment securities are classified as available-for-sale with changes in fair value recorded in accumulated other comprehensive (loss) income within shareholder’s equity on Credco’s Consolidated Balance Sheets.
The fair market values for Credco’s investment securities are obtained primarily from pricing services engaged by Credco, and Credco receives one price for each security. The fair values provided by the pricing services are estimated by using pricing models, where the inputs to those models are based on observable market inputs. The inputs to the valuation techniques applied by the pricing services vary depending on the type of security being priced but are typically benchmark yields, benchmark security prices, credit spreads, prepayment speeds, reported trades, broker-dealer quotes, all with reasonable levels of transparency. The pricing services do not apply any adjustments to the pricing models used, nor does Credco apply any adjustments to prices received from the pricing services. As of December 31, 2008, all of Credco’s investment securities are classified in Level 2 of the fair value hierarchy. See further discussion in Note 3 to Credco’s Consolidated Financial Statements.
In the measurement of fair value for Credco’s investment securities, even though the underlying inputs used in the pricing models are directly observable from active markets or recent trades of similar securities in inactive markets, the pricing models do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value.
Other-Than-Temporary Impairment
Credco reviews and evaluates its investment securities, at least quarterly, and more often as market conditions may require, to identify investment securities that have indications of other-than-temporary impairments. The determination of other-than-temporary impairment is a subjective process, requiring the use of judgments and assumptions. Accordingly, Credco considers several metrics when evaluating investment securities for an other-than-temporary impairment, including the extent to which amortized cost exceeds fair value, the duration and size of that difference, and the issuer’s credit rating. Key factors considered when assessing other-than-temporary impairment include the determination of the extent to which the difference is due to increased default risk for the specific issuers, or market interest rate risk. With respect to market interest rate risk, including benchmark interest rates and credit spreads, Credco’s intent and ability to hold the investment securities for a time sufficient to recover the unrealized losses is a significant consideration in the other-than-temporary evaluation process. See further discussion in Note 3 to Credco’s Consolidated Financial Statements.
In determining whether any of Credco’s investment securities are other-than-temporarily impaired, a change in facts and circumstances could lead to a change in management judgment around Credco’s view on collectibility and credit quality of the issuer, or Credco’s ability and intent to hold the investment securities for a time sufficient to recover the unrealized losses. This could result in Credco recording an other-than-temporary impairment loss through earnings with a corresponding offset to accumulated other comprehensive (loss) income. As of December 31, 2008, Credco had no gross unrealized losses in its investment securities portfolio that were deemed not to be other-than-temporarily impaired.
Derivative Instruments
Credco’s primary derivative instruments include interest rate swaps, forward agreements, foreign currency options and cross-currency swaps. Derivative instruments are reported in other assets and other liabilities on Credco’s Consolidated Balance Sheets. Changes in fair value are recorded in accumulated other comprehensive (loss) income, and/or in the Consolidated Statements of Income, depending on (i) the documentation and designation of the derivative instrument, and (ii) if the derivative instrument is in a hedging relationship, its effectiveness in offsetting the changes in the designated risk being hedged.
The fair values of Credco’s derivative instruments are estimated by using pricing models that do not contain a high level of subjectivity as the valuation techniques used do not require significant judgment and inputs to those models are readily observable from actively quoted markets. The valuation models used by Credco are consistently applied and reflect the contractual terms of the derivatives, including the period of maturity, and market-based parameters such as interest rates, foreign exchange rates, and volatility. In certain instances credit valuation adjustments are necessary when the market parameters (for example, a benchmark curve) used to value the derivative instruments are not indicative of the credit quality of Credco or its counterparties. Credco considers the counterparty credit risk by applying an observable forecasted default rate to the current exposure. As of December 31, 2008, the credit and nonperformance risks associated with Credco derivative counterparties were not significant.
Credco manages derivative instrument counterparty credit risk by considering the current exposure, which is the replacement cost of contracts on the measurement date, as well as estimating the maximum potential value of the contracts over the next twelve months, considering such factors as the volatility of the underlying or reference index. To mitigate derivative instrument credit risk, counterparties are required to be pre-approved and rated as investment grade. Counterparty risk exposures are monitored by American Express Institutional Risk Management Committee (IRMC). The IRMC formally reviews large institutional exposures to ensure compliance with American Express Enterprise-wide Risk Management Committee guidelines and procedures and determines the risk mitigation actions, when necessary. Credco’s derivative instruments are classified in Level 2 of the fair value hierarchy. See further discussion in Note 7 to Credco’s Consolidated Financial Statements.
In the measurement of fair value for Credco’s derivative instruments, although the underlying inputs used in the pricing models are readily observable from actively quoted markets, the pricing models do entail a certain amount of subjectivity and therefore differing judgments in how the underlying inputs are modeled could result in different estimates of fair value. In addition, although counterparty credit risk is actively managed by the IRMC, and any necessary credit valuation adjustments are based on observable default rates, a change in facts and circumstances could lead to a change in management judgment about counterparty credit quality, which could result in Credco recognizing an additional counterparty credit valuation adjustment. As of December 31, 2008, the credit and nonperformance risks associated with Credco’s derivative instrument counterparties were not significant.
Income Taxes
The taxable income of Credco is included in the consolidated United States federal income tax return of American Express. Under an agreement with TRS, taxes are recognized on a separate company basis. American Express is subject to the income tax laws of the United States, its states and municipalities and those of the foreign jurisdictions in which American Express operates. These tax laws are complex, and the manner in which they apply to the taxpayer’s facts is sometimes open to interpretation. In establishing a provision for income tax expense, management must make judgments about the application of these inherently complex tax laws.
Credco establishes a liability for unrecognized tax benefits, which are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized in the financial statements. In establishing a liability for an unrecognized tax benefit, assumptions may be made in determining whether a tax position is more likely than not to be sustained upon examination by the taxing authority and also in determining the ultimate amount that is likely to be realized. A tax position is recognized when, based on
management’s judgment regarding the application of income tax laws, it is more likely than not that the tax position will be sustained upon examination. The amount of tax benefit recognized is based on management’s assessment of the most likely outcome on ultimate settlement with the taxing authority. This measurement is based on many factors, including whether a tax dispute may be settled through negotiation with the taxing authority or is only subject to review in the courts. As new information becomes available, management evaluates its tax positions, and adjusts its unrecognized tax benefits, as appropriate.
If the tax benefit ultimately realized differs from the amount previously recognized in the income tax provision, Credco recognizes an adjustment of the unrecognized tax benefit through the income tax provision.
Deferred tax assets and liabilities are determined based on the differences between the GAAP financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax asset will not be realized.
Since deferred taxes measure the future tax effects of items recognized in the financial statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information.
Should a change in facts or circumstances lead to a change in judgment about the ultimate realizability of a deferred tax asset, Credco records or adjusts the related valuation allowance in the period that the change in facts or circumstances occurs, along with a corresponding increase or decrease to the income tax provision.
Impact of Credit and Capital Market Environment
Credit Markets - U.S. Cardmember Receivables
During 2008, deteriorating home prices, rising unemployment and broad tightening of consumer credit adversely affected U.S. credit card issuers generally, including American Express issuers that sell receivables to Credco.
In managing risk on behalf of Credco, TRS’ objective is to protect its profitability, but also protect, to the extent it can, TRS’ ongoing relationship with the cardmembers and their experience. With this in mind, the following actions have been taken by TRS across the U.S. cardmember portfolios:
•
incorporating more sophisticated information in TRS’s risk evaluations;
•
focusing on areas of high risk, and canceling certain accounts;
•
reducing some customer lines of credit;
•
increasing the number of customer care professionals; and
•
assisting cardmembers who are experiencing temporary financial difficulty.
American Express’ view is that economic conditions will deteriorate further in 2009. The impact to Credco is that its purchases of receivables and loans will decline because of reduced cardmember spending. This is in addition to the expected reduction in purchases as a result of the amendment to the Receivables Agreements in October 2008 discussed previously.
Capital Markets
The global money and capital markets have been experiencing periods of liquidity disruption and rate volatility since the third quarter of 2007. Liquidity, benchmark interest rates, and credit concerns were further
exacerbated during September 2008, fueled by heightened concerns about the global financial system after the collapse of several large financial institutions in the United States and elsewhere.
Credco’s funding strategy includes the issuance of debt with a wide range of maturities to spread out or “ladder” the refinancing requirements in future periods. This includes both unsecured term debt and commercial paper. Since September 2008, the market for Credco’s unsecured term debt, like that for virtually all financial institutions, has been effectively frozen.
Certain programs sponsored by the federal government and certain of its departments and agencies launched or announced by the United States and other governments during the fourth quarter of 2008 provided some stability to the capital markets and reduced dislocations in benchmark indices such as LIBOR. However, if the unprecedented levels of volatility and disruptions reemerge or worsen, they could negatively impact Credco’s funding capabilities, liquidity position, and investment portfolios or derivative positions.
Investment Portfolio
Credco’s investment portfolio primarily supports its contingent liquidity strategy, by investing in U.S. Government and agencies obligations. Credco’s objective is to manage the type and mix of assets as well as their maturity profile in order to ensure the cash and liquidity needs can be met without relying on the sale of investments prior to maturity. As a result, Credco generally holds its investments until their maturity. Credco nonetheless seeks to invest in portfolios of securities with sufficient liquidity that could be accessed prior to maturity should changes in cash needs occur.
All of Credco’s investments are classified as available-for-sale. Credco reviews its investments at least quarterly and more often as market conditions may require to evaluate their fair values and to identify investments that have indications of other-than-temporary impairments. The determination of other-than-temporary impairments for available-for-sale securities is a subjective process, requiring the use of various assumptions and application of judgment.
Government Sponsored Enterprises
At December 31, 2008, Credco owned approximately $2.7 billion of senior unsecured debentures issued by Government Sponsored Enterprises (GSEs): Fannie Mae and Freddie Mac. On September 7, 2008, the Federal Housing Finance Agency (FHFA) announced the decision to place Fannie Mae and Freddie Mac into a conservatorship run by FHFA. These actions were designed to protect the senior and subordinated debt and the mortgage-backed securities of the GSEs. The total net unrealized gains on these securities were approximately $37 million at December 31, 2008.
Money Market Fund
Credco owned a $500 million investment in the Reserve Primary Fund (the Fund), a money market fund. The net asset value of the Fund fell below $1 per share in September 2008. Credco recorded a loss of $15 million related to its investment in the Fund in September 2008. Credco received approximately $390 million from the Fund since it filed a redemption order with Reserve, the Fund sponsor, in September 2008. The remaining amount due from the Fund is recorded in deferred charges and other assets on Credco’s Consolidated Balance Sheets. On February 20, 2009, Credco received $33 million from the Fund. The timing of receipt of the remaining proceeds cannot be determined at this time.
With the exception of its exposure to the Fund, Credco did not experience any defaults or events of default, or determine it would not receive timely contractual payments of interest and repayment of principal on any of its holdings in its investment portfolios.
Consolidated Capital Resources and Liquidity
Credco’s balance sheet management objectives are to maintain a broad, deep and diverse set of funding sources to finance its assets and meet operating requirements and liquidity programs that enable Credco to
meet its obligations for at least a 12 month period should some or all of its funding sources become inaccessible.
Funding Strategy
Credco seeks to maintain broad and well-diversified funding sources to allow it to meet its maturing obligations and cost-effectively finance current and future asset growth as well as to maintain a strong liquidity profile. Diversity of funding sources by type of debt instrument, by maturity and by investor base, among other factors, provides additional insulation from the impact of disruptions in any one type of debt, maturity, or investor. The mix of Credco’s funding in any period will seek to achieve cost-efficiency consistent with both maintaining diversified sources and achieving its liquidity objectives. Credco’s funding strategy and activities are integrated into its asset-liability management activities.
The recent turmoil in the money and capital markets during 2008 resulted in changes to the mix and cost of financing Credco obtained from its traditional funding sources.
Credco has historically relied on the debt capital markets to satisfy a substantial amount of its funding needs, as do many financial services companies. Notwithstanding the difficult conditions in the financial markets during the past year, Credco accessed a variety of capital markets sources during the first three quarters of the year. Credco’s issuances of debt securities, similar to most issuances across the capital markets, included spreads above benchmark rates that were significantly greater than those on similar issuances during the prior several years.
Credco’s strategy is to issue debt with a wide range of maturities to reduce and spread out the refinancing requirements in future periods. However, Credco’s ability to obtain financing in the debt capital market for unsecured term debt is subject to a renewal of investor demand. Credco continues to assess its needs and investor demand, which will likely change the mix of its existing sources as well as seek to add new sources to its funding mix. Credco’s funding plan is subject to various risks and uncertainties, such as disruption of financial markets, market capacity and demand for securities offered by Credco and regulatory changes. Many of these risks and uncertainties are beyond Credco’s control.
Credco’s funding strategy is designed to maintain high and stable debt ratings from the major credit rating agencies, Moody’s Investor Services (Moody’s), Standard & Poor’s (S&P), Fitch Ratings, and Dominion Bond Rating Service (DBRS). Recently, three of the four credit rating agencies that rate Credco provided updates on Credco’s ratings as follows:
§
During the fourth quarter of 2008, Moody’s lowered the senior long-term debt ratings of Credco from Aa3 to A1 and revised its outlook of Credco from stable to negative. This change, which brings the ratings for Credco’s funding to the same level as other rating agencies, reflected concerns regarding weakness in the broader economy and specific concerns regarding “negative asset quality trends and lending exposures.” Moody’s affirmed all of its short-term ratings (P-1). On February 25, 2009, Moody’s placed Credco long-term ratings on review for possible downgrade. The P-1 short-term rating was affirmed.
§
During the fourth quarter of 2008, S&P lowered the long-term ratings on Credco from A+ to A. The outlook on the rating was negative. S&P affirmed its short-term ratings (A-1). On March 19, 2009, S&P placed both its long- and short-term ratings on Credco on “CreditWatch” with negative implications.
§
On January 29, 2009, DBRS announced that it had revised its outlook on the long-term senior ratings of Credco (A (high)) from stable to negative.
Maintenance of high and stable debt ratings is critical to ensuring Credco has continuous access to capital and
credit markets at cost-effective rates. Historically, credit ratings have had a significant impact on the borrowing capacity and costs of Credco. A downgrade in Credco’s long-term debt rating would result in higher interest expense on Credco’s unsecured debt, as well as higher fees related to borrowings under its unused lines of credit. A downgrade of one level in Credco’s short-term rating would result in Credco having to significantly reduce or eliminate its outstanding commercial paper compared to historical levels. In the event a reduction in its borrowing capacity in the short-term debt markets were to occur, Credco would further shift its funding to other funding programs, such as issuance of long-term debt, to the extent these markets are available.
Short-term funding programs
Credco’s short-term funding requirements have historically been met primarily by the sale of commercial paper. Credco’s commercial paper is a widely recognized name in the money markets and is supported by a diverse base among short-term investors. Credco has readily sold the volume of commercial paper necessary to meet its funding needs as well as to cover the daily maturities of commercial paper issued. During 2008, Credco had continuous access to the commercial paper markets to fund its business operations. Its commercial paper issuances after mid-September occurred at shorter weighted average maturities than Credco’s historical trend, consistent with the changes in issuance maturities occurring across the overall commercial paper market, as reported by the Federal Reserve.
The shortening of the maturities in the commercial paper markets makes it more difficult for Credco to manage its day-to-day cash flow. Since year-end, Credco has reduced its reliance on the commercial paper market.
On October 7, 2008, the Federal Reserve Board established the Commercial Paper Funding Facility (CPFF). The CPFF provides three-month liquidity to U.S. issuers of commercial paper through a special purpose vehicle (SPV), which purchases three month unsecured and asset-backed commercial paper directly from eligible issuers using financing provided by the Federal Reserve Bank of New York. The commercial paper must be rated at least A1/P1/F1 by a major nationally recognized statistical rating organization (NRSRO) and, if rated by multiple major NRSROs, must be rated at least A1/P1/F1/R1 (middle) by two or more NRSROs. Credco is eligible to have up to $14.7 billion of commercial paper outstanding with the SPV at any one time. The SPV is currently scheduled to cease purchasing commercial paper on October 30, 2009, unless the Board extends the facility. At December 31, 2008, Credco had $7.3 billion of commercial paper outstanding, including $4.5 billion under the CPFF. As of March 30, 2009, there was no commercial paper outstanding under the CPFF.
The table below illustrates Credco’s commercial paper outstanding and back-up liquidity coverage at December 31:
(a)
Average commercial paper outstanding includes amounts issued through the CPFF program.
(b)
Credco currently manages the level of short-term debt outstanding, exclusive of short-term debt to affiliates, such that its total back-up liquidity, including maximum available bank credit facilities and term liquidity portfolio investment securities, is not less than 100 percent of net short-term debt. Net short-term debt consists of commercial paper and certain other short-term borrowings less cash and cash equivalents. Credco’s total back-up liquidity coverage of net short-term borrowings was in excess of 100 percent at December 31, 2008 and 2007.
(c)
Based on the maximum available borrowings under committed third party bank credit facilities and term liquidity portfolio investment securities.
Long-term debt programs
Long-term debt is raised through the offering of debt securities in the United States and international capital markets. Long-term debt is generally defined as any debt with an original maturity greater than 12 months.
Credco had the following long-term debt outstanding at December 31:
See further details on total year-end stated rates on debt and maturities in Note 5 to the Consolidated Financial Statements.
Credco regularly seeks to expand the capacity and diversity of its funding sources. In August 2008, Credco commenced an InterNotes® program that offers retail investors the opportunity to make unsecured medium- and long-term fixed income investments in Credco. Credco raised over $408 million of funding under this program through December 31, 2008.
Credco also has the ability to issue debt securities under shelf registrations filed with the Securities and Exchange Commission (SEC). The shelf registration statement filed with the SEC is for an unspecified amount of debt securities to be issued from time to time. During 2008, Credco issued $5.8 billion of fixed and floating rate long-term debt securities with maturities ranging from two to seven years, from its U.S. shelf registration. At December 31, 2008, Credco had $13.0 billion of debt securities outstanding, issued under the SEC registration statements.
Credco, in conjunction with certain subsidiaries of American Express, has established a program for the issuance, outside the United States, of debt instruments to be listed on the Luxembourg Stock Exchange. During 2008, this program was renewed and the maximum aggregate principal amount of debt instruments outstanding at any one time under the program was increased to $50.0 billion. The proceeds of these issuances are used for financing operations, including the purchase of receivables and the repayment of previously issued debt. At December 31, 2008, $3.7 billion was outstanding under this program, of which $2.4 billion was issued by Credco.
Credco established a program in Australia for the issuance of debt securities from time to time of up to approximately $4.2 billion. During 2008, no notes were issued under this program. At December 31, 2008, approximately $3.5 billion was available for issuance under this program.
During the first quarter of 2008, a new shelf prospectus was filed and became effective in Canada for a medium-term note program providing for the issuance from time to time, in Canada, of up to approximately $2.9 billion of notes by American Express Canada Credit Corporation (Cancredco), an indirect wholly owned subsidiary of Credco. All notes issued under this shelf registration will be guaranteed by Credco. During 2008, Cancredco issued approximately $411 million of medium-term notes. The financial results of Cancredco are included in the consolidated financial results of Credco.
The most restrictive limitation on dividends imposed by the debt instruments issued by Credco is the requirement that Credco maintain a minimum consolidated net worth of $50 million. There are no significant restrictions on the ability of Credco to obtain funds from its subsidiaries by dividend or loan. Additionally, there are no limitations on the amount of debt that can be issued by Credco.
Credco paid cash dividends of $580 million and $750 million to TRS in 2008 and 2007, respectively. On February 10, 2009, Credco paid a cash dividend of $75 million to TRS.
Liquidity Strategy
Credco seeks to ensure that it has adequate liquidity in the form of cash and readily-marketable securities easily convertible into cash, as well as access to cash and equivalents, to continuously meet its business needs, sustain operations and satisfy its obligations for a period of at least 12 months without access to the unsecured debt capital markets. This objective is managed by regularly accessing capital through a broad and diverse set of funding programs, by maintaining cash and readily-marketable securities, as well as through a variety of contingent sources of cash and financing. Credco maintains a liquidity plan that enables it to continuously meet its daily obligations when its access to financing becomes impaired or markets become inaccessible. The plan contemplates a hypothetical 12-month liquidity crisis occurring as a sudden and unexpected event that makes financing from its various funding sources unavailable.
The sources of cash in such stress environment include, but are not limited to, Credco’s cash and readily-marketable securities, securitizations of cardmember receivables through RFC V and AEIT, loans through American Express affiliates, and bank credit facilities. Credco has identified over $35 billion in alternate sources of cash from these sources.
As a result of Credco’s funding activities during 2008, Credco raised funds that substantially exceeded its 2008 funding needs. The excess was invested with the purpose of increasing the amount of cash and readily-marketable securities Credco holds.
The amount of cash and readily-marketable securities Credco expects to maintain will be substantially greater than its historical levels of holdings. Credco expects to incur higher net interest cost on these amounts, which will be dependent on the amount Credco actually maintains, as well as the difference between its cost of funding these amounts and their investment yields.
Cash and Readily-Marketable Securities
At December 31, 2008, Credco had cash and cash equivalents of approximately $8.9 billion as well as $3.1 billion of longer-term readily-marketable securities. These investments are of high credit quality, highly liquid short-term instruments and longer term, highly liquid instruments, such as U.S. Treasury securities, government-sponsored enterprise debt, or government-guaranteed debt. These instruments are managed to either mature prior to the maturity of borrowings that will occur within the next 12 months, or are sufficiently liquid that Credco can sell them or enter into sale/repurchase agreements to immediately raise cash proceeds to meet liquidity needs.
Committed Bank Credit Facilities
Credco maintained committed bank credit facilities at December 31, 2008 as follows:
(a)
Committed lines supported by 34 financial institutions.
(b)
Credco has the right to borrow a maximum amount of $10.4 billion with a commensurate maximum $1.3 billion reduction in the amount available to American Express.
Credco’s committed bank credit facilities expire as follows:
The availability of the credit lines is subject to Credco’s compliance with certain financial covenants that require maintenance of a 1.25 ratio of combined earnings and fixed charges to fixed charges. The ratio of earnings to fixed charges for Credco and American Express was as follows:
Committed bank credit facilities do not contain material adverse change clauses, which may preclude borrowing under the credit facilities. Additionally, the facilities may not be terminated should there be a change in Credco’s credit rating.
In consideration of all the funding sources, Credco believes that it would have the liquidity to satisfy all maturing obligations and fund normal business operations for at least a 12-month period in the event that access to the secured and unsecured fixed income capital markets is completely interrupted for that length of time. These events are not considered likely to occur.
Results of Operations
Pretax income depends primarily on the volume of cardmember receivables and loans purchased, the discount factor used to determine purchase price, the relationship of the total discount to Credco’s interest expense and the collectibility of cardmember receivables and loans purchased.
Credco’s consolidated net income rose 3 percent to $745 million for the year ended December 31, 2008, as compared to the year ended December 31, 2007. The year-over-year increase was primarily due to a decrease in interest expense, provisions for losses, net of recoveries and loan service fees and an increase in interest income earned on loans to affiliates, partially offset by a decrease in discount revenue earned from purchased cardmember receivables and loans, and a decrease in interest income from investments.
The following table summarizes the changes attributable to the increase (decrease) in key revenue and expense accounts:
Discount Revenue Earned on Purchased Cardmember Receivables and Loans
Discount revenue decreased 24 percent or $682 million to $2.2 billion for 2008, as compared to 2007, due to a decrease in both the volume of receivables purchased and discount rates. Volume of receivables and loans purchased for 2008, was 18 percent lower than 2007, primarily due to the amendment of the Receivables Agreements between each of Credco and Centurion Bank and FSB; purchased volume does not include those cardmember receivables transferred with recourse to Credco and cardmember receivables and loans funded by loans to affiliates. Discount rates, which vary over time due to changes in market interest rates or changes in the collectibility of cardmember receivables, decreased an average of approximately 7 basis points compared to the year ended December 31, 2007.
Interest Income from Affiliates
Interest income from affiliates increased 14 percent or $94 million to $744 million in 2008, as compared to 2007. The year-over-year increase is due to an increase in the volume of loans to affiliates, partially offset by a decrease in the interest rates charged to affiliates. The average volume of loans to affiliates increased partially due to loans to both Centurion Bank and FSB, as a consequence of amending the Receivables Agreements. The average interest rate charged to affiliates during 2008, was 16 basis points lower than the average interest rate charged to affiliates in 2007.
Interest Income from Investments
Interest income from investments decreased 11 percent or $31 million to $247 million for 2008, as compared to 2007. The year-over-year decrease is due to an increase in the average outstanding amount of cash and cash
equivalents offset by the decrease of the average interest rate on the total investment portfolio of approximately 211 basis points for 2008, as compared to 2007. The increase in cash and cash equivalents reflects the issuance of short- and long-term debt that was in excess of Credco’s business operating needs, and investment of the excess proceeds in cash equivalents.
Provisions for Losses, Net of Recoveries
The provisions for losses, net of recoveries decreased 24 percent or $201 million to $641 million for 2008, as compared to 2007. The year-over-year decrease primarily reflects the reduction in the volume of receivables purchased partially offset by higher write-off and delinquency rates compared to 2007, reflecting a more difficult U.S. credit environment.
Interest Expense and Interest Expense to Affiliates
Interest expense and interest expense to affiliates decreased 15 percent and 41 percent, respectively, for 2008 compared to 2007, due to lower interest rates partially offset by higher average debt outstanding. The average interest rate on debt outstanding during 2008, was 101 basis points lower than 2007. The average rate due to affiliates during 2008, was 241 basis points lower than 2007.
Service Fees to Affiliates
Credco pays fees to affiliates for the related servicing of the receivables purchased. Service fees to affiliates decreased 10 percent or $19 million to $173 million for 2008, as compared to 2007, due to a decrease in servicing provided under service level agreements with affiliates, in particular with Centurion Bank and FSB.
Income Taxes
Credco’s effective tax rate for the years ended December 31, 2008, 2007 and 2006, was 8.4 percent, 7.3 percent and 13.2 percent, respectively. The effective tax rate was higher in 2008 as compared to 2007 primarily due to the attribution and change in the geographic mix of pretax income among various jurisdictions. The effective tax rate was lower in 2007 as compared to 2006 primarily as a result of an increase in the benefits related to its ongoing funding activities outside the United States.
Item 7A.
Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Credco’s risk management objective is to monitor and control risk exposures to earn returns commensurate with the appropriate level of risk assumed. In addition to business risk, Credco recognizes four fundamental sources of risk: credit risk, market risk, liquidity risk and operational risk. These risks, which are described below, are interrelated, and management has adopted well defined risk-taking principles to guide Credco’s business strategies and objectives. Credco views credit risk as a component of driving profitable growth. Market risk is hedged or managed within established parameters to sustain such earnings growth. Liquidity risk is managed through the diversification of funding sources, while operational risk arising from Credco’s business activities is carefully monitored to maintain it within acceptable limits.
Credco’s risk management oversight is performed through internal and independent oversight functions. Risk management governance at Credco begins with the American Express Board approved risk management policies and objectives and the American Express Board oversight of risk management parameters. Supporting the American Express Board in its oversight function are other risk management oversight committees, such as American Express’ Treasury Department and other asset and liability management committees. The American Express Enterprise Risk Management Committee (ERMC) supplements the risk management capabilities resident within American Express’ business segments by routinely reviewing key market, credit, operational and other risk concentrations across American Express and recommending action where appropriate. The ERMC recommends risk limits, promotes an understanding of risks across American Express, including Credco, and supports management in making risk-return decisions.
Credit Risk Management Process
TRS manages the overall credit risk exposure associated with the cardmember receivables and loans purchased by Credco. Credit risk is defined as the risk of loss from an obligor or counterparty default. Credco is exposed to credit risk through the cardmember receivables and cardmember loans it purchases generally without recourse, as well as through its participation interests. Since such a portfolio consists of millions of borrowers and individual exposures across multiple geographies, occupations, and social segments, its risk is substantially reduced through diversification. A loss distribution is characterized by a higher frequency but manageable severity that is more closely linked to general economic and legal conditions than by borrower-specific events. Receivable and loan purchase decisions and the related discount pricing are impacted by the overall credit risk considerations inherent in the cardmember receivables and cardmember loans.
Credit risk associated with Credco’s derivatives is limited to the risk that a derivative counterparty will not perform in accordance with the terms of the contract. To mitigate such risk, Credco’s counterparties are all required to be rated as investment grade. Additionally, Credco enters into master netting agreements with its counterparties wherever practical.
Market Risk Management Process
Market risk is the risk to earnings or value resulting from movements in market prices. Credco’s market risk consists primarily of interest rate risk and foreign exchange risk. Market risk exposures are monitored and managed by various risk committees, American Express’ Treasury Department as well as by Credco’s management. Credco operates under American Express Board approved policies related to market risk management and the use of derivative financial instruments. With respect to derivative financial instruments, the value of such instruments is derived from an underlying variable or multiple variables, including interest rate, foreign exchange, and equity indices or prices. These instruments enable end users to increase, reduce, or alter exposure to various market risks and, for that reason, are an integral component of Credco’s market risk and related asset liability management strategy and processes. See Note 7 to the Consolidated Financial Statements for additional discussion of Credco’s derivative financial instruments.
Interest rate risk is primarily generated by the funding of cardmember receivables and fixed-rate cardmember
loan purchases with variable rate borrowings. These assets and liabilities generally do not create naturally offsetting positions with respect to basis, re-pricing or maturity characteristics. By using derivative financial instruments, such as interest rate swaps, the interest rate profile can be adjusted to maintain and manage a desired profile. At both December 31, 2008 and 2007, the total notional amount of interest rate swaps was approximately $8 billion. These derivatives generally qualify for hedge accounting. A portion of these derivatives outstanding as of December 31, 2008 extend to 2015.
In addition, foreign exchange risk is generated by cross-currency purchased cardmember receivables and cardmember loans, foreign currency denominated balance sheet exposures and foreign currency earnings in international units. Credco hedges this market exposure to the extent it is economically justified through various means including local market cross-currency funding and the use of derivative financial instruments, such as foreign exchange forward and cross-currency swap contracts, which can help “lock in” Credco’s exposure to specific currencies. At both December 31, 2008 and 2007, the total notional amount of foreign exchange derivatives was approximately $5 billion. These derivatives generally do not qualify for hedge accounting, however, derivative hedging activities related to translation exposure of foreign operations generally do.
The following discussion includes sensitivity analysis of interest rate and foreign currency risk and estimates the effects of hypothetical sudden and sustained changes in the applicable market conditions on the ensuing year’s earnings, based on year-end positions. The market changes, assumed to occur as of year-end, are a 100 basis point increase in market interest rates and a 10 percent strengthening of the U.S. dollar versus all other currencies. Computations of the prospective effects of hypothetical interest rate and foreign exchange rate changes are based on numerous assumptions, including relative levels of market interest rates and foreign exchange rates, as well as the levels of assets and liabilities. The hypothetical changes and assumptions will be different from what actually occurs in the future. Furthermore, the computations do not incorporate actions that management could take if the hypothetical market changes actually occur, including revising the discount rate applicable to purchases of new receivables. As a result, actual earnings consequences will differ from those quantified. The detrimental effect on Credco’s pretax earnings of a hypothetical 100 basis point increase in interest rates would be approximately $36 million based on the 2008 year-end positions. This effect, which is calculated using a static asset/liability gapping model, is primarily a function of the extent of variable rate funding of charge card and fixed rate lending products, to the degree that interest rate exposure is not managed by derivative financial instruments. From a foreign exchange risk perspective, based on the year-end 2008 and 2007 foreign exchange positions, the effect on Credco’s earnings of the hypothetical 10 percent strengthening of the U.S. dollar would be immaterial.
Liquidity Risk Management Process
Liquidity risk is defined as the inability to access cash and equivalents needed to meet business requirements and satisfy Credco’s obligations. Credco balances the trade-offs between maintaining too much liquidity, which can be costly and limit financial flexibility, with having inadequate liquidity, which may result in financial distress during a liquidity event. Liquidity risk is centrally managed by the Funding and Liquidity Committee of American Express, chaired by American Express’ Corporate Treasurer. American Express has developed a liquidity plan that enables it to meet its daily cash obligations when access to unsecured funds in the debt capital markets is impaired or unavailable. This plan is designed to ensure that American Express and all of its main operating entities, including Credco, could continuously maintain business operations for a 12-month period in which its access to all capital markets financing is interrupted. The hypothetical 12-month liquidity 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.
Liquidity risk is managed both at an aggregate American Express level and at the major legal entities, including Credco, in order to ensure that sufficient funding and contingent liquidity resources are available in the amount and in the location needed in a stress event. American Express’ Funding and Liquidity Committee manages the forecasts of American Express’ aggregate and subsidiary cash positions and financing
requirements, the funding plans designed to satisfy those requirements under normal conditions, establishes guidelines to identify the amount of contingent liquidity resources required, and monitors positions and determines any actions to be taken. Liquidity planning also takes into account operating cash flexibilities.
Operational Risk Management Process
Managing operational risk is an important priority for Credco. Credco defines operational risk as the risk of not achieving business objectives due to inadequate or failed processes or information systems, human error or the external environment (e.g., natural disasters), including losses due to failures to comply with laws and regulations. Operational risk is inherent in all business activities and can impact an organization through direct or indirect financial loss, brand damage, customer dissatisfaction, or legal or regulatory penalties. Current areas of significant focus include data protection, vendor risk, financial reporting risk and both internal and external fraud.
Credco is committed to improving its ability to prioritize and manage operational risk through the delivery of a comprehensive operational risk program. In order to appropriately measure operational risk, American Express has developed a comprehensive operational risk model. This model assesses (i) risk events, i.e. what occurred or could have occurred; (ii) root causes, i.e. why did it occur or could have occurred; and (iii) impact, i.e. how was Credco affected or might have been affected. This model and other American Express initiatives have resulted in improved operational risk intelligence and heightened level of preparedness to manage risk events and conditions that may adversely impact American Express’ operations. However, day-to-day management of operational risk lies with Credco. Credco continues to enhance its operational risk management practices on an ongoing basis.
Item 8.
Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
1.
Financial Statements.
See Index to Financial Statements at page hereof.
2.
Supplementary Financial Information.
Selected quarterly financial data. See Note 14 to the Consolidated Financial Statements appearing herein.
Item 9.
Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A(T).
Item 9A(T).
CONTROLS AND PROCEDURES
Credco’s management, with the participation of Credco’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Credco’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, Credco’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Credco’s disclosure controls and procedures are effective.
There have not been any changes in Credco’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during Credco’s fourth fiscal quarter that have materially affected, or are reasonably likely to materially affect, Credco’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The management of Credco is responsible for establishing and maintaining adequate internal control over financial reporting. Credco’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, and includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of Credco;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of Credco are being made only in accordance with authorizations of management and directors of Credco; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Credco’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Credco’s management assessed the effectiveness of Credco’s internal control over financial reporting as of December 31, 2008. In making this assessment, Credco’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Controls - Integrated Framework.
Based on management’s assessment and those criteria, management has concluded that, as of December 31, 2008, Credco’s internal control over financial reporting is effective.
This annual report does not include an attestation report of PricewaterhouseCoopers LLP, Credco’s registered public accounting firm, regarding internal control over financial reporting. Management’s report was not subject to attestation by Credco’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit Credco to provide only management’s report in this annual report.
Pursuant to Item 308T(a) of Regulation S-K, this Management’s Report on Internal Control Over Financial Reporting shall not be deemed to be filed for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.
Item 9B.
Item 9B.
OTHER INFORMATION
Not applicable.
PART III
Item 10.
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Omitted pursuant to General Instruction I(2) (c) to Form 10-K.
Item 11.
Item 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I(2) (c) to Form 10-K.
Item 12.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to General Instruction I(2) (c) to Form 10-K.
Item 13.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Omitted pursuant to General Instruction I(2) (c) to Form 10-K.
Item 14.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The Audit Committee of the Board of Directors of American Express Company has appointed PricewaterhouseCoopers LLP as the independent registered public accounting firm to audit the Consolidated Financial Statements of Credco for the year ended December 31, 2008.
Each year the Audit Committee reviews the accountants’ qualifications, performance and independence in accordance with regulatory requirements and guidelines. At least every ten
years, the Audit Committee charter requires a detailed review of American Express’ accounting firm, which would include a comparison of resources available in other firms. The Committee conducted such a review in 2004, resulting in the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm for Credco for the year beginning January 1, 2005.
Audit Fees
The aggregate fees billed or to be billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of Credco’s Consolidated Financial Statements and services that were provided in connection with statutory and regulatory filings or engagements and other attest services were $300,913 and $263,500 for the years ended December 31, 2008 and 2007, respectively.
Audit-Related Fees
Credco was not billed by PricewaterhouseCoopers LLP for any fees for audit-related services for 2008 or 2007.
Tax Fees
Credco was not billed by PricewaterhouseCoopers LLP for any tax fees for 2008 or 2007.
All Other Fees
Credco was not billed by PricewaterhouseCoopers LLP for any other fees for 2008 or 2007.
Policy on Pre-Approval of Services Provided by Independent Registered Public Accountants
Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the terms of the engagement of Credco’s independent registered public accounting firm is subject to the specific pre-approval of the Audit Committee of American Express. All audit and permitted non-audit services to be performed by Credco’s independent registered public accounting firm require pre-approval by the Audit Committee in accordance with pre-approval procedures established by the Audit Committee. All such services provided by Credco's independent registered public accounting firm have been pre-approved. The procedures require all proposed engagements of Credco’s independent registered public accounting firm for services to Credco of any kind to be directed to the General Auditor of American Express and then submitted for approval to the Audit Committee of American Express prior to the beginning of any services.
Other Transactions with PricewaterhouseCoopers LLP
American Express has a number of business relationships with individual member firms of the worldwide PricewaterhouseCoopers LLP organization. American Express subsidiaries provide card and travel services to some of these firms and these firms pay fees to American Express subsidiaries. These services are in the normal course of business and American Express provides them pursuant to arrangements that American Express offers to other similar clients.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN EXPRESS CREDIT CORPORATION
(Registrant)
DATE:
March 30,
By
/s/Christopher S. Forno
Christopher S. Forno
President and Chief Executive Officer
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities on the dates indicated.
DATE:
March 30,
By
/s/Christopher S. Forno
Christopher S. Forno
President, Chief Executive Officer
and Director
DATE:
March 30,
/s/Lawrence A. Belmonte
Lawrence A. Belmonte
Vice President and Chief Accounting Officer
DATE:
March 30,
/s/David L. Yowan
David L. Yowan
Chief Financial Officer and Director
AMERICAN EXPRESS CREDIT CORPORATION
COVERED BY REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
(Item 15