AMERICAN EXPRESS CREDIT CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDER’S EQUITY
(Unaudited)
| | | | | | | | | | | Accumulated | | | | |
| | | | | | | | Additional | | | Other | | | | |
Three months ended March 31, 2019 | | | | Common | | | Paid-in | | | Comprehensive | | | Retained | |
(Millions) | | Total | | | Stock | | | Capital | | | Loss | | Earnings | |
Balances as of December 31, 2018 | | $ | 2,196 | | | $ | ― | | | $ | 161 | | | $ | (1,060 | ) | | $ | 3,095 | |
Net income | | | 103 | | | | ― | | | | ― | | | | ― | | | | 103 | |
Other comprehensive income | | | 7 | | | | ― | | | | ― | | | | 7 | | | | ― | |
Balances as of March 31, 2019 | | $ | 2,306 | | | $ | ― | | | $ | 161 | | | $ | (1,053 | ) | | $ | 3,198 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Accumulated | | | | | |
| | | | | | | | | | Additional | | | Other | | | | | |
Three months ended March 31, 2018 | | | | | Common | | | Paid-in | | | Comprehensive | | | Retained | |
(Millions) | | Total | | | Stock | | | Capital | | | Loss | | Earnings | |
Balances as of December 31, 2017 | | $ | 1,871 | | | $ | ― | | | $ | 161 | | | $ | (998 | ) | | $ | 2,708 | |
Net income | | | 129 | | | | ― | | | | ― | | | | ― | | | | 129 | |
Other comprehensive income | | | 10 | | | | ― | | | | ― | | | | 10 | | | | ― | |
Balances as of March 31, 2018 | | $ | 2,010 | | | $ | ― | | | $ | 161 | | | $ | (988 | ) | | $ | 2,837 | |
See Notes to Consolidated Financial Statements.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
American Express Credit Corporation (Credco), together with its subsidiaries,Credco is a wholly owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly owned subsidiary of American Express Company (American Express).
Credco is engaged in the business of financing certain non-interest-earning Card Member receivables arising from the use of the American Express charge cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-earning revolving loans generated by Card Member spending on American Express credit cards issued in non-U.S. markets.
Credco executes material transactions with its affiliates. The agreements between Credco and its affiliates provide that the parties intend that the transactions thereunder be conducted on an arm’s lengtharm’s-length basis; however, there can be no assurance that the terms of these arrangements are the same as would be negotiated between independent, unrelated parties.
American Express provides Credco with financial support with respect to maintenance of its minimum overallrequired 1.25 fixed charge coverage ratio, which is achieved by charging appropriate discount rates on the purchases of receivables Credco makes from, and the interest rates on the loans Credco provides to, TRS and other American Express subsidiaries. Each monthly period, the discount and interest rates are determined to generate income for Credco that is sufficient to maintain its minimum fixed charge coverage ratio. The revenue earned by Credco from purchasing Card Member receivables and Card Member loans at a discount is reported as discount revenue on the Consolidated Statements of Income and Retained Earnings.Income.
The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in Credco’s Annual Report on Form 10-K for the year ended December 31, 2017 (Form 10-K).2018. If not materially different, certain footnotenote disclosures included therein have been omitted from this Quarterly Report on Form 10-Q.these Consolidated Financial Statements.
The interim consolidated financial information in this report has not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim period consolidated financial information, have been made. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.
The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting estimates reflect the best judgment of management, but actual results could differ.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued new accounting guidance for the recognition of credit losses on financial instruments, effective January 1, 2020, with early adoption permitted on January 1, 2019.2020. The guidance introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which is based on expected losses, and differs significantly from the incurred loss approach used today. The CECL model requires measurement of expected credit losses not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. The guidance also requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. Credco does not intendcontinues to adopt the new standard early and is currently evaluatingevaluate the impact the new guidance will have on itsCredco’s financial position and results of operations and cash flows; however, it is expected that theoperations. The CECL model will alter the assumptions used in estimating credit losses on Card Member receivables and loans, and Credco may result inhave material increaseschanges to Credco’sits credit reserves as the new guidance involves earlier recognition of expected losses for the life of the assets. However, the extent of the impact will depend on the characteristics of Credco’s loan portfolio, macroeconomic conditions and forecasted information at the date of adoption. American Express continues to drive its cross-functional implementation efforts and has established an enterprise-wide, cross-discipline governance structure to implementsubstantially completed development of CECL models. Continuing through 2019, American Express is validating and analyzing model output during CECL parallel runs, and developing the business processes, policies and controls that satisfy the requirements of the new standard, and continue to identify and conclude on key interpretive issues along with evaluating American Express’ existing credit loss forecasting models and processes in relation to the new guidance to determine what modifications may be required.standard.
Recently Adopted Accounting Standards
In February 2018, as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Act)Act), the FASB issued new accounting guidance on the reclassification of certain tax effects from accumulated other comprehensive income (loss) (AOCI) to retained earnings. The optionalCredco adopted the new guidance is effective January 1, 2019 with early adoption permitted. Credco is evaluating whether it will adopt the new guidance along with any impacts on Credco’s financial position, results of operations and cash flows, none of which are expected to be material.
Recently Adopted Accounting Standards
In January 2016, the FASB issued new accounting guidance on the recognition and measurement of financial assets and financial liabilities, which was effective and adopted by Credco as of January 1, 2018. The guidance makes targeted changes to GAAP; specifically to the classification and measurement of equity securities, and to certain disclosure requirements associated with the fair value of financial assets and liabilities. The adoption of the guidance did not have a material impact on Credco’s financial position, results of operations and cash flows. Credco implemented changes to its accounting policies, business processes and internal controls in support ofelect the new guidance. Such changes were not material.
In November 2016, the FASB issued new accounting guidance on the cash flow classification and presentation of changes in restricted cash or restricted cash equivalents, effective January 1, 2018. The guidance provides specifically that amounts generally described as restricted cash and restricted cash equivalents are to be included with cash and cash equivalents on the statements of cash flows. Credco holds a restricted cash balance such that it becomes a material change to the way balances are presented on the statements of cash flows. Beginning with the quarter ended March 31, 2018, Credco’s consolidated statements of cash flows reflect the adoption of the standard using the full retrospective method, which applies the new standard to each prior reporting period presented.
In August 2017, the FASB issued new accounting guidance providing targeted improvements to the accounting for hedging activities, effective January 1, 2019, with early adoption permitted in any interim period or fiscal year before the effective date. The guidance introduces a number of amendments, several of which are optional that are designed to simplify the application of hedge accounting, improve financial statement transparency and more closely align hedge accounting with an entity’s risk management strategies. Effective January 1, 2018, Credco adopted the guidance with no material impact on its financial position, results of operations and cash flows, along with associated changes to its accounting policies, business processes and internal controls in support of the new guidance. Such changes were not material.reclassification.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Information
Effective for the second quarter of 2018, American Express realigned its reportable operating segments to reflect the organizational changes announced during the first quarter of 2018 which combined its U.S. and International consumer businesses into a global consumer services organization, among other changes. To enhance the comparability and usefulness of Credco’s financial statements with that of American Express, Credco has also combined its U.S. and International consumer Card Member receivables and loans in Note 2 for the periods presented. This change did not have any impact on Credco’s underlying assumptions or judgments with respect to reserves for losses or credit performance.
2. Card Member Receivables and Card Member Loans
Generally, a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. The following table presents the aging of Card Member receivables and Card Member loans as of June 30, 2018March 31, 2019 and December 31, 2017:2018:
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reserves for losses relating to Card Member receivables and Card Member loans represent management’s best estimate of the probable inherent losses in Credco’s outstanding portfolio of receivables and loans, as of the balance sheet date. Management’s evaluation process requires certain estimates and judgments.
Changes in Card Member Receivables Reserve for Losses
The following table presents changes in the Card Member receivables reserve for losses for the sixthree months ended June 30:
March 31:
(Millions) | | 2019 | | | 2018 | |
Balance, January 1 | | $ | 167 | | | $ | 145 | |
Provisions | | | 60 | | | | 62 | |
Other credits(a) | | | 9 | | | | 28 | |
Net write-offs(b) | | | (61 | ) | | | (56 | ) |
Balance, March 31 | | $ | 175 | | | $ | 179 | |
(Millions) | | 2018 | | | 2017 | |
Balance, January 1 | | $ | 145 | | | $ | 110 | |
Provisions | | | 119 | | | | 113 | |
Other credits (a) | | | 32 | | | | 33 | |
Net write-offs (b) | | | (119 | ) | | | (94 | ) |
Other debits (c) | | | (20 | ) | | | (16 | ) |
Balance, June 30 | | $ | 157 | | | $ | 146 | |
(a) | Primarily reserve balances applicablerelated to new groups of, and participation interests in, Card Member receivables purchased from TRS and certain of its subsidiaries and participation interests from affiliates. New groups of Card Member receivables purchased totaled $5.5affiliates, totaling $1.6 billion and $6.0$4.3 billion for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. |
(b) | Net of recoveries of $55$31 million and $45$28 million for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. |
(c) | Primarily reserve balances related to participation interests in Card Member receivables sold to an affiliate. Participation interests in Card Member receivables sold totaled $3.4 billion and $2.6 billion for the six months ended June 30, 2018 and 2017, respectively. |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes in Card Member Loans Reserve for Losses
The following table presents changes in the Card Member loans reserve for losses for the sixthree months ended June 30:March 31:
(Millions) | | 2018 | | | 2017 | | | 2019 | | | 2018 | |
Balance, January 1 | | $ | 5 | | | $ | 5 | | | $ | 5 | | | $ | 5 | |
Provisions | | | 3 | | | | 3 | | | | 3 | | | | 2 | |
Net write-offs(a) | | | (3 | ) | | | (3 | ) | | | (2 | ) | | | (1 | ) |
Balance, June 30 | | $ | 5 | | | $ | 5 | | |
Balance, March 31 | | | $ | 6 | | | $ | 6 | |
(a) | Net of recoveries of $1.0$0.3 million for each ofboth the sixthree months ended June 30, 2018March 31, 2019 and 2017.2018. |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Derivatives and Hedging Activities
Credco uses derivative financial instruments (derivatives) to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates and foreign exchange rates, and are carried at fair value on the Consolidated Balance Sheets. 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 management. Credco does not transact in derivatives for trading purposes.
In relation to Credco’s credit risk, under the termscertain of theCredco’s bilateral derivative agreements it has with its variousinclude provisions that allow counterparties Credco is not required to either immediately settle any outstanding liability balances or post collateral uponterminate the occurrenceagreement in the event of a specifieddowngrade of Credco’s debt credit risk-related event.rating below investment grade and settle the outstanding net liability position. As of March 31, 2019, these derivatives were not in a material net liability position. Based on Credco’s assessment of the credit risk of its derivative counterparties as of June 30, 2018March 31, 2019 and December 31, 2017,2018, no credit risk adjustment to the derivative portfolio was required.
A majority of Credco’s derivative assets and liabilities as of March 31, 2019 and December 31, 2018 are subject to master netting agreements with its derivative counterparties. Credco has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.
The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2018March 31, 2019 and December 31, 2017:2018:
| | Other Assets | | | Other Liabilities | |
| | Fair Value | | | Fair Value | |
(Millions) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Fair value hedges - Interest rate contracts (a)(b) | | $ | ― | | | $ | ― | | | $ | 6 | | | $ | ― | |
Net investment hedges - Foreign exchange contracts | | | 19 | | | | 57 | | | | 40 | | | | 10 | |
Total derivatives designated as hedging instruments | | | 19 | | | | 57 | | | | 46 | | | | 10 | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | 30 | | | | 220 | | | | 114 | | | | 6 | |
Total derivatives, gross | | | 49 | | | | 277 | | | | 160 | | | | 16 | |
Less: Derivative asset and derivative liability netting (c) | | | (27 | ) | | | (11 | ) | | | (27 | ) | | | (11 | ) |
Total derivatives, net | | $ | 22 | | | $ | 266 | | | $ | 133 | | | $ | 5 | |
| | Other Assets | | | Other Liabilities | |
| | Fair Value | | | Fair Value | |
(Millions) | | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Derivatives designated as hedging instruments: | | | | | | | | | | | | |
Fair value hedges - Interest rate contracts (a) | | $ | ― | | | $ | ― | | | $ | 1 | | | $ | ― | |
Net investment hedges - Foreign exchange contracts | | | 129 | | | | 54 | | | | 7 | | | | 38 | |
Total derivatives designated as hedging instruments | | | 129 | | | | 54 | | | | 8 | | | | 38 | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | |
Foreign exchange contracts | | | 65 | | | | 9 | | | | 14 | | | | 57 | |
Total derivatives, gross | | | 194 | | | | 63 | | | | 22 | | | | 95 | |
Less: Cash collateral netting (b) | | | ― | | | | ― | | | | ― | | | | ― | |
Derivative asset and derivative liability netting (c) | | | (10 | ) | | | (26 | ) | | | (10 | ) | | | (26 | ) |
Total derivatives, net | | $ | 184 | | | $ | 37 | | | $ | 12 | | | $ | 69 | |
(a) | For Credco’s centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral. Accordingly, the amounts disclosed for centrally cleared derivatives are based on gross assets and gross liabilities, net of variation margin. |
(b) | Credco posted $81$44 million and $115$55 million as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other assets on Credco’s Consolidated Balance Sheets and are not netted against the derivative balances. |
(c) | Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterpartycounterparties under an enforceable master netting arrangement. |
A majority of Credco’s derivative assets and liabilities as of June 30, 2018 and December 31, 2017 are subject to master netting agreements with its derivative counterparties. Credco has no derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value Hedges
Credco is exposed to interest rate risk associated with its fixed-rate long-term debt obligations. At the time of issuance, certain fixed-rate debt obligations are designated in fair value hedging relationships using interest rate swaps to economically convert the fixed interest rate to a floating interest rate. Credco has $15.3$12.5 billion and $16.2$13.8 billion of its fixed-rate debt obligations designated in fair value hedging relationships as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.
The following table representspresents the gains and losses recognized in Interest expense associated with the fair value hedges of Credco’s fixed-rate long-term debt:
| | Gains (losses) | | | Gains (losses) | |
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | |
| | June 30, | | | June 30, | | | March 31, | |
(Millions) | | 2018 | | | 2017 | | | 2018 | | | 2017 | | | 2019 | | | 2018 | |
| | Interest Expense(a) | | | Other Expenses | | | Interest Expense(a) | | | Other Expenses | | |
Fixed-rate long-term debt | | $ | 12 | | | $ | (37 | ) | | $ | 127 | | | $ | (8 | ) | | $ | (67) | | | $ | 115 | |
Derivatives designated as hedging instruments | | | (20 | ) | | | 20 | | | | (115 | ) | | | (30 | ) | | | 65 | | | | (95 | ) |
Total | | $ | (8 | ) | | $ | (17 | ) | | $ | 12 | | | $ | (38 | ) | | $ | (2) | | | $ | 20 | |
(a) | Credco adopted new accounting guidance providing targeted improvements to the accounting for hedging activities effective January 1, 2018. In compliance with the standard, amounts previously recorded in Other expenses have been prospectively recorded in Interest expense. Refer to Note 1 for additional information. |
The carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $15.0$12.4 billion and $16.0$13.5 billion as of June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, including offsetting amounts of $282$116 million and $155$184 million for the respective periods, related to the cumulative amount of fair value hedging adjustments.
Credco recognized a net increase of $19$32 million and a net reduction of $17$4 million in interestInterest expense on long-term debt for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and a net increase of $23 million and a net reduction of $39 million for the six months ended June 30, 2018 and 2017, respectively, primarily related to the net settlements (interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.
Credco had notional amounts of approximately $2.9 billion of foreign currency derivatives designated as net investment hedges as of both March 31, 2019 and December 31, 2018. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, was a gainwere losses of $105$57 million and a loss of $40$43 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively and a gain of $62 million and a loss of $168 million for the six months ended June 30, 2018 and 2017, respectively. No amounts associated with net investment hedges were reclassified from AOCI into income for the three and six months ended June 30, 2018March 31, 2019 and 2017.
2018.
Derivatives Not Designated as Hedges
The changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in net gains of $15$23 million and $6$15 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and net gains of $30 million and $10 million for the six months ended June 30, 2018 and 2017, respectively, and are recognized in Other expenses.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Financial Assets and Financial Liabilities Carried at Fair Value
The following table summarizes Credco’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s fair value hierarchy as Level 2, as of June 30, 2018March 31, 2019 and December 31, 2017:2018:
(Millions) | | 2018 | | | 2017 | |
Assets: | | | | | | |
Derivatives (a) | | $ | 194 | | | $ | 63 | |
Total assets | | | 194 | | | | 63 | |
Liabilities: | | | | | | | | |
Derivatives (a) | | | 22 | | | | 95 | |
Total liabilities | | $ | 22 | | | $ | 95 | |
(Millions) | | 2019 | | | 2018 | |
Assets: | | | | | | |
Derivatives, gross (a) | | $ | 49 | | | $ | 277 | |
Total assets | | | 49 | | | | 277 | |
Liabilities: | | | | | | | | |
Derivatives, gross (a) | | | 160 | | | | 16 | |
Total liabilities | | $ | 160 | | | $ | 16 | |
(a) | Refer to Note 4 for the fair values of derivative assets and liabilities, on a further disaggregated basis. |
Financial Assets and Financial Liabilities Carried at Other Than Fair Value
The following table summarizes the estimated fair value for Credco’s financial assets and financial liabilities that are measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of June 30, 2018March 31, 2019 and December 31, 2017.2018. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of June 30, 2018March 31, 2019 and December 31, 20172018, and require management judgment. These figures may not be indicative of future fair values, nor can Credco’sthe fair value of Credco be estimated by aggregating the amounts presented.
| | Carrying | | | Corresponding Fair Value Amount | |
2018 (Billions) | | Value | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial Assets: | | | | | | | | | | | | | | | |
Financial assets for which carrying values equal or approximate fair value | | | | | | | | | | | | | | | |
Cash and cash equivalents (a) | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | ― | | | $ | ― | |
Other financial assets (b) | | | 22.9 | | | | 22.9 | | | | 0.1 | | | | 22.8 | | | | ― | |
Financial assets carried at other than fair value | | | | | | | | | | | | | | | | | | | | |
Card Member loans, net | | | 0.6 | | | | 0.6 | | | | ― | | | | ― | | | | 0.6 | |
Loans to affiliates and other | | | 13.4 | | | | 13.3 | | | | ― | | | | 8.4 | | | | 4.9 | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
Financial liabilities for which carrying values equal or approximate fair value | | | 10.5 | | | | 10.5 | | | | ― | | | | 10.5 | | | | ― | |
Financial liabilities carried at other than fair value | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 23.6 | | | | 23.7 | | | | ― | | | | 23.7 | | | | ― | |
Long-term debt with affiliates | | $ | 0.3 | | | $ | 0.3 | | | $ | ― | | | $ | 0.3 | | | $ | ― | |
| | Carrying | | | Corresponding Fair Value Amount | |
2019 (Billions) | | Value | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial Assets: | | | | | | | | | | | | | | | |
Financial assets for which carrying values | | | | | | | | | | | | | | | |
equal or approximate fair value | | | | | | | | | | | | | | | |
Cash and cash equivalents(a) | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | ― | | | $ | ― | |
Other financial assets(b) | | | 26.0 | | | | 26.0 | | | | 0.1 | | | | 25.9 | | | | ― | |
Financial assets carried at other than fair value | | | | | | | | | | | | | | | | | | | | |
Card Member loans, net | | | 0.6 | | | | 0.6 | | | | ― | | | | ― | | | | 0.6 | |
Loans to affiliates and other | | | 14.2 | | | | 14.3 | | | | ― | | | | 7.6 | | | | 6.7 | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | |
Financial liabilities for which carrying values equal | | | | | | | | | | | | | | | | | | | | |
or approximate fair value | | | 8.9 | | | | 8.9 | | | | ― | | | | 8.9 | | | | ― | |
Financial liabilities carried at other than fair value | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 18.3 | | | | 18.5 | | | | ― | | | | 18.5 | | | | ― | |
Long-term debt to affiliates | | $ | 10.6 | | | $ | 10.6 | | | $ | ― | | | $ | 10.6 | | | $ | ― | |
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| | Carrying | | | Corresponding Fair Value Amount | | | Carrying | | | Corresponding Fair Value Amount | |
2017 (Billions) | | Value | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | |
2018 (Billions) | | | Value | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial assets for which carrying values equal or approximate fair value | | | | | | | | | | | | | | | | |
Financial assets for which carrying values | | | | | | | | | | | | | | | | |
equal or approximate fair value | | | | | | | | | | | | | | | | |
Cash and cash equivalents (a) | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.2 | | | $ | ― | | | $ | ― | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | ― | | | $ | ― | |
Other financial assets (b) | | | 20.6 | | | | 20.6 | | | | 0.1 | | | | 20.5 | | | | ― | | | | 24.9 | | | | 24.9 | | | | 0.1 | | | | 24.8 | | | | ― | |
Financial assets carried at other than fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Card Member loans, net | | | 0.6 | | | | 0.6 | | | | ― | | | | ― | | | | 0.6 | | | | 0.6 | | | | 0.6 | | | | ― | | | | ― | | | | 0.6 | |
Loans to affiliates and other | | | 14.5 | | | | 14.4 | | | | ― | | | | 10.0 | | | | 4.4 | | | | 14.1 | | | | 14.1 | | | | ― | | | | 7.4 | | | | 6.7 | |
Financial Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities for which carrying values equal or approximate fair value | | | 8.6 | | | | 8.6 | | | | ― | | | | 8.6 | | | | ― | | |
Financial liabilities for which carrying values equal | | | | | | | | | | | | | | | | | | | | | |
or approximate fair value | | | | 9.0 | | | | 9.0 | | | | ― | | | | 9.0 | | | | ― | |
Financial liabilities carried at other than fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | | 24.2 | | | | 24.5 | | | | ― | | | | 24.5 | | | | ― | | | | 20.4 | | | | 20.5 | | | | ― | | | | 20.5 | | | | ― | |
Long-term debt with affiliates | | $ | 0.3 | | | $ | 0.3 | | | $ | ― | | | $ | 0.3 | | | $ | ― | | |
Long-term debt to affiliates | | | $ | 7.5 | | | $ | 7.3 | | | $ | ― | | | $ | 7.3 | | | $ | ― | |
(a) | Amounts reflect interest-bearing deposits. |
(b) | Level 1 amounts reflect interest-bearing restricted cash and Level 2 amounts primarily reflect Card Member receivables. |
Nonrecurring Fair Value Measurements
During the sixthree months ended June 30, 2018March 31, 2019 and during the year ended December 31, 2017,2018, Credco did not have any assets that were measured at fair value due to impairment on a nonrecurring basis.
6. Variable Interest Entity
Credco established a Variable Interest Entity, American Express Canada Credit Corporation (AECCC), primarily to issue notes in Canada under a medium-term note program and lend the proceeds to affiliates. The notes issued under the medium-term note program are fully guaranteed by Credco. Credco is considered the primary beneficiary of the entity and owns all of the outstanding voting interests and, therefore, consolidates the entity.
As of June 30, 2018 and December 31, 2017, total assets of AECCC were $8 million and $466 million, respectively, and total liabilities were nil and $457 million, respectively, none of which were eliminated in consolidation. In March 2018, the funds lent by AECCC were repaid by the affiliates and used to satisfy the scheduled maturity of notes issued under the medium-term note program.
AMERICAN EXPRESS CREDIT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7.6. Changes in Accumulated Other Comprehensive Income
AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. Changes in Foreign Currency Translation Adjustments for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 were as follows:
Three Months Ended June 30, 2018 (Millions), net of tax | | | |
Balances as of March 31, 2018 | | $ | (988 | ) |
Net translation loss of investments in foreign operations | | | (126 | ) |
Net gains related to hedges of investment in foreign operations | | | 105 | |
Net change in accumulated other comprehensive loss | | | (21 | ) |
Balances as of June 30, 2018 | | $ | (1,009 | ) |
| | Foreign Currency | |
| | Translation | |
| | Adjustments | |
2019 (Millions), net of tax | | Gains (Losses) | |
Balances as of December 31, 2018 | | $ | (1,060 | ) |
Net translation gain of investments in foreign operations | | | 64 | |
Net losses related to hedges of investment in foreign operations | | | (57 | ) |
Net change in accumulated other comprehensive loss | | | 7 | |
Balances as of March 31, 2019 | | $ | (1,053 | ) |
| | | | |
| | | | |
| | | | |
| | Foreign Currency | |
| | Translation | |
| | Adjustments | |
2018 (Millions), net of tax | | Gains (Losses) | |
Balances as of December 31, 2017 | | $ | (998 | ) |
Net translation gain of investments in foreign operations | | | 53 | |
Net losses related to hedges of investments in foreign operations | | | (43 | ) |
Net change in accumulated other comprehensive loss | | | 10 | |
Balances as of March 31, 2018 | | $ | (988 | ) |
Six Months Ended June 30, 2018 (Millions), net of tax | | | |
Balances as of December 31, 2017 | | $ | (998 | ) |
Net translation loss of investments in foreign operations | | | (73 | ) |
Net gains related to hedges of investment in foreign operations | | | 62 | |
Net change in accumulated other comprehensive loss | | | (11 | ) |
Balances as of June 30, 2018 | | $ | (1,009 | ) |
Three Months Ended June 30, 2017 (Millions), net of tax | | | |
Balances as of March 31, 2017 | | $ | (955 | ) |
Net translation gain of investments in foreign operations | | | 54 | |
Net losses related to hedges of investment in foreign operations | | | (40 | ) |
Net change in accumulated other comprehensive loss | | | 14 | |
Balances as of June 30, 2017 | | $ | (941 | ) |
Six Months Ended June 30, 2017 (Millions), net of tax | | | |
Balances as of December 31, 2016 | | $ | (1,263 | ) |
Net translation gain of investments in foreign operations(a) | | | 490 | |
Net losses related to hedges of investment in foreign operations | | | (168 | ) |
Net change in accumulated other comprehensive loss | | | 322 | |
Balances as of June 30, 2017 | | $ | (941 | ) |
(a) | Includes $289 million of tax benefits recognized in the six months ended June 30, 2017. |
No amounts were reclassified out of AOCI into the Consolidated Statements of Income and Retained Earnings for the three and six months ended June 30, 2018March 31, 2019 and 2017.2018.
8.7. Income Taxes
The results of operations of Credco are included in the consolidated U.S. federal income tax return of American Express. Under an agreement with American Express, provision for income taxes is recognized on a separate company basis. If benefits for net operating losses, future tax deductions and foreign tax credits cannot be recognized on a separate company basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on an American Express consolidated reporting basis.
The effective tax rate was 5.413.4 percent and (9.6)(19.4) percent for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and (8.0) percent and 1.7 percent for the six months ended June 30, 2018 and 2017, respectively. The changes in tax rates for both periods primarily reflect a reduction in the U.S. statutory corporate income tax rate from 35 percent to 21 percent effective January 1, 2018, as a result of the Tax Act. The tax rate for the sixthree months ended June 30,March 31, 2018 includes a $24 million discrete tax benefit related to the Tax Act that reduced the reported effective tax rate by 11.9 percent and is related to a revision to the provisional tax charge recorded in 2017 as a result of the Tax Act. The revision to the provisional tax charge results from additional analysis of the foreign withholding tax consequences of future cash dividends paid from non-U.S. subsidiaries. Credco is still analyzing the impacts of the Tax Act; therefore, the 2017 tax charge continues to be provisional.22.2 percent.
The tax rate in each of the periods reflects the geographic mix of expenses in the United States that generates a tax benefit at the U.S. statutory rate and foreign earnings taxed at lower rates, and the favorable impact of the tax benefit related to Credco’s ongoing funding activities outside the United States. Credco’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to volatility in certain components of revenues and expenses that prevents Credco from projecting a reliable estimate of full year pretax income. A discrete calculation of the provision for income taxes is recorded for each interim period.
American ExpressCredco is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which American Expressit has significant business operations. The tax years under examination and open for examination vary by jurisdiction. American Express is currently under examination with the IRSIn 2018, Credco settled its U.S. federal income tax audits for tax years 20082008-2014, and the statute of limitations for these years remain open through 2014.2019. Tax years from 2015 onwards are open for examination by the IRS.
Credco believes it is reasonably possible that its unrecognized tax benefits could decrease by an immaterial amount within the next 12 months, principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the attribution of taxable income to a particular jurisdiction or jurisdictions. The resolution of such items would not have a material impact on Credco’s effective tax rate.
Item 2. | ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A) |
Overview
American Express Credit Corporation (Credco), together with its subsidiaries,Credco is a wholly owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly owned subsidiary of American Express Company (American Express). Both American Express and TRS are bank holding companies.
Credco is engaged in the business of financing certain non-interest-earning Card Member receivables arising from the use of the American Expresscharge cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-earning revolving loans generated by Card Member spending on American Express credit cards issued in non-U.S. markets.
Certain of the statements in this Form 10-Q report are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Cautionary Note Regarding Forward-Looking Statements” section.
Business Overview
Management’s discussion of the results of Credco is in the context of the wider business environment for American Express.
American Express’ results for the secondfirst quarter reflect strong performance that continues the momentum from the beginning ofa solid start to the year, as it progresses againstwith broad based billings and revenue growth across its four strategic imperatives – strengtheningbusinesses and geographies. American Express continued to invest in new services and Card Member benefits, new card acquisitions and expanding its leadership position with premium consumers, extending its strong position in the commercial payments space, strengthening its global, integratedmerchant network, and making it returned a significant amount of capital to its shareholders through share repurchases and dividends.
American Express an essential partcontinues to see attractive growth opportunities across its businesses and plans to invest to take advantage of its customers’ digital lives.
them in order to drive revenue growth over the moderate to long term. While American Express continues to see some headwinds in the environment, including from a rising interest rate environment, regulation in countries around the world and intense competition, it remains focused on delivering differentiated value to its merchants, customersCard Members and business partners whileand delivering appropriate returns to its shareholders.
Effective for the second quarter of 2018, American Express realigned its reportable operating segments to reflect the organizational changes announced during the first quarter of 2018 which combined its U.S. and International consumer businesses into a global consumer services organization, among other changes. To enhance the comparability and usefulness of Credco’s financial statements with that of American Express, Credco has also combined its U.S. and International consumer Card Member receivables and loans in Note 2 to the Consolidated Financial Statements for the periods presented. This change did not have any impact on Credco’s underlying assumptions or judgments with respect to reserves for losses or credit performance.
Results of Operations for the SixThree Months Ended June 30,March 31, 2019 and 2018 and 2017
Net income depends largely on the volume of Card Member receivables and Card Member loans purchased, the discount rate used to determine purchase price, interest earned, interest expense, collectability of purchased Card Member receivables and Card Member loans, and income taxes.
Credco’s consolidated net income increaseddecreased by $101$26 million to $217$103 million, as compared to net income of $116$129 million for the same period in 2017.2018. The year-over-year increasedecrease in net income is primarily driven by an increasethe discrete tax benefit of $24 million related to the Tax Cuts and Jobs Act (the Tax Act) recorded in discount revenue earned from Card Member receivables and loans and higher interest income from affiliates and other, partially offset by higher interest expense.
Table 1: Total Revenues Summary
Six Months Ended June 30, | | | | | | | | Change | |
(Millions, except percentages) | | 2018 | | | 2017 | | | 2018 vs. 2017 | |
Discount revenue earned from purchased Card Member receivables and loans | | $ | 462 | | | $ | 359 | | | $ | 103 | | | 29 | % |
Interest income from affiliates and other | | | 179 | | | | 123 | | | | 56 | | | 46 | |
Finance revenue | | | 28 | | | | 23 | | | | 5 | | | 22 | |
Total revenues | | $ | 669 | | | $ | 505 | | | $ | 164 | | | 32 | % |
Three Months Ended March 31, | | | | | | | | Change | |
(Millions, except percentages) | | 2019 | | | 2018 | | | 2019 vs. 2018 | |
Discount revenue earned from purchased Card Member receivables and Card Member loans | | $ | 303 | | | $ | 214 | | | $ | 89 | | | | 42 | % |
Interest income from affiliates and other | | | 110 | | | | 89 | | | | 21 | | | | 24 | |
Finance revenue | | | 19 | | | | 15 | | | | 4 | | | | 27 | |
Total revenues | | $ | 432 | | | $ | 318 | | | $ | 114 | | | | 36 | % |
Total revenues
Discount revenue increased, due to higher discount raterates and higher volumes of receivables purchased.
Interest income increased, primarily due to higher interest rates and higher average loan balances.rates.
Finance revenue increased, primarily due to higher average outstanding Card Member loan balances.
Table 2: Total Expense Summary
Six Months Ended June 30, | | | | | | | | Change | |
(Millions, except percentages) | | 2018 | | | 2017 | | | 2018 vs. 2017 | |
Provisions for losses | | $ | 122 | | | $ | 116 | | | $ | 6 | | | 5 | % |
Interest expense | | | 304 | | | | 220 | | | | 84 | | | 38 | |
Interest expense to affiliates | | | 69 | | | | 22 | | | | 47 | | | # | |
Other, net | | | (27 | ) | | | 29 | | | | (56 | ) | | # | |
Total expenses | | $ | 468 | | | $ | 387 | | | $ | 81 | | | 21 | % |
Three Months Ended March 31, | | | | | | | | Change | |
(Millions, except percentages) | | 2019 | | | 2018 | | | 2019 vs. 2018 | |
Provisions for losses | | $ | 63 | | | $ | 64 | | | $ | (1 | ) | | | (2 | )% |
Interest expense | | | 169 | | | | 131 | | | | 38 | | | | 29 | |
Interest expense to affiliates | | | 104 | | | | 29 | | | | 75 | | | | # | |
Other, net | | | (23 | ) | | | (14 | ) | | | (9 | ) | | | 64 | |
Total expenses | | $ | 313 | | | $ | 210 | | | $ | 103 | | | | 49 | % |
# Denotes a variance greater than 100 percent
Total expenses
Provisions for losses increased, primarily due to higher write-offs.
Interest expense increased, primarily due to higher LIBOR rates partially offset byand a fair value hedge ineffectiveness gains previously reportedloss during the quarter ended March 31, 2019 as compared to a fair value hedge ineffectiveness gain in Other expense.the prior period.
Interest expense to affiliates increased, primarily due to higher LIBOR rates andan increase in average debt balances.balances and higher interest rates.
Other expenses decreased, primarily driven by a fair value hedge ineffectiveness loss of $38 million in the prior period, now reported in Interest expense and higher forward point gains of $20 million.gains.
Income taxes
The effective tax rates were 5.413.4 percent and (9.6)(19.4) percent for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and (8.0) percent and 1.7 percent for the six months ended June 30, 2018 and 2017, respectively. The changes in tax rates for both periods primarily reflect a reduction in the U.S. statutory corporate income tax rate from 35 percent to 21 percent effective January 1, 2018, as a result of the Tax Cuts and Jobs Act (the Tax Act). The tax rate for the sixthree month period ended June 30,March 31, 2018 includes a $24 million discrete tax benefit related to a revision to the provisional tax charge recorded in 2017.Tax Act. Refer to Note 87 to the Consolidated Financial Statements for additional information.
Card Member Receivables and Card Member Loans
The net volume of Card Member receivables and Card Member loans purchased during the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 was approximately $142$78 billion and $126$74 billion, respectively.
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, Credco owned $22.8$26.0 billion and $20.3$24.6 billion, respectively, of gross Card Member receivables. Card Member receivables represent amounts due on American Express charge card products and are recorded at the time they are purchased from the seller. Included in Card Member receivables are Credco Receivables Corporation’s (CRC) purchases of participation interests from RFC VIII in conjunction with TRS’ securitization program. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, CRC owned approximately $4.8$7.5 billion and $4.1$6.7 billion, respectively, of such participation interests.
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, Credco owned gross Card Member loans totaling $581$643 million and $561$641 million, respectively. These loans generally represent revolving amounts due on American Express lending card products.
The following table summarizes selected information related to the Card Member receivables portfolio as of June 30:March 31:
Table 3: Selected Information Related to Card Member Receivables
(Millions, except percentages and where indicated) | | 2018 | | | 2017 | |
Total gross Card Member receivables (a) | | $ | 22,792 | | | $ | 21,876 | |
Loss reserves ― Card Member receivables (a) | | $ | 157 | | | $ | 146 | |
Loss reserves as a % of receivables | | | 0.7 | % | | | 0.7 | % |
Average life of Card Member receivables (# in days) (b) | | | 29 | | | | 29 | |
(Millions, except percentages and where indicated) | | 2019 | | | 2018 | |
Total gross Card Member receivables(a) | | $ | 26,007 | | | $ | 24,864 | |
Loss reserves ― Card Member receivables(a) | | $ | 175 | | | $ | 179 | |
Loss reserves as a % of receivables | | | 0.7 | % | | | 0.7 | % |
Average life of Card Member receivables (# in days)(b) | | | 29 | | | | 28 | |
(a) | Refer to Notes 2 and 3 to the Consolidated Financial Statements for further discussion. |
(b) | Represents the average life of Card Member 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 periods indicated, to the volume of Card Member receivables purchased by Credco. |
Loans to Affiliates and Other
Credco’s loans to affiliates and other represent floating-rate interest-bearing borrowings by wholly owned subsidiaries of TRS and the joint ventures that issue American Express cards in certain countries. The components of loans to affiliates and other as of June 30, 2018March 31, 2019 and December 31, 20172018 were as follows:
Table 4: Loans to Affiliates and Other
(Millions) | | 2018 | | | 2017 | |
American Express Limited | | $ | 3,847 | | | $ | 3,847 | |
American Express Services Europe Limited | | | 2,826 | | | | 2,747 | |
American Express Australia Limited | | | 1,734 | | | | 1,616 | |
American Express International, Inc. | | | 1,222 | | | | 1,180 | |
Amex Bank of Canada | | | 1,141 | | | | 1,737 | |
Amex Global Holdings C.V. | | | 888 | | | | 888 | |
American Express Company (Mexico) S.A. de C.V. | | | 829 | | | | 812 | |
American Express International, Inc.– Branch – Singapore | | | 344 | | | | 124 | |
American Express Bank (Mexico) S.A. | | | 337 | | | | 325 | |
Alpha Card S.C.R.L./C.V.B.A | | | 117 | | | | 138 | |
American Express International (NZ), Inc. | | | 74 | | | | 80 | |
American Express Saudi Arabia (C) JSC | | | 28 | | | | 34 | |
Amex Funding Management (Europe) Limited | | | 15 | | | | 38 | |
American Express Company | | | ― | | | | 961 | |
Total(a) | | $ | 13,402 | | | $ | 14,527 | |
(Millions) | | 2019 | | | 2018 | |
American Express Limited | | $ | 3,847 | | | $ | 3,847 | |
American Express Services Europe Limited | | | 3,551 | | | | 3,552 | |
American Express Australia Limited | | | 1,888 | | | | 1,839 | |
Amex Bank of Canada | | | 1,302 | | | | 1,334 | |
American Express International, Inc. | | | 1,255 | | | | 1,243 | |
Amex Global Holdings C.V. | | | 888 | | | | 888 | |
American Express Company (Mexico) S.A. de C.V. | | | 496 | | | | 463 | |
American Express International, Inc.– Branch – Singapore | | | 379 | | | | 383 | |
American Express Bank (Mexico) S.A. | | | 376 | | | | 348 | |
Alpha Card S.C.R.L./C.V.B.A | | | 107 | | | | 114 | |
American Express Saudi Arabia (C) JSC | | | 74 | | | | 53 | |
American Express International (NZ), Inc. | | | 72 | | | | 72 | |
Total(a) | | $ | 14,235 | | | $ | 14,136 | |
(a) | As of June 30, 2018both March 31, 2019 and December 31, 2017,2018, approximately $5.4$7.2 billion and $5.0 billion, respectively, were collateralized by the underlying Card Member receivables and Card Member loans transferred with recourse. |
Due from/to Affiliates
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, amounts due from affiliates were $17$19 million and $189$210 million, respectively. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, amounts due to affiliates were $2.9$3.0 billion and $2.0$2.9 billion, respectively. These amounts relate primarily to timing differences from the purchase of Card Member receivables, net of remittances from TRS and its subsidiaries, as well as from operating activities. As of both June 30, 2018March 31, 2019 and December 31, 2017,2018, due to affiliates also includes an amount pertaining to tax liability on account of the Tax Act.
Restricted Cash with Affiliates
As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the amount of interest-bearing restricted cash was $95 million and $100$93 million, respectively, which represents cash placeddeposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans and the purchase of Card Member receivables.loans. It has beenis included under “Other assets” on the Consolidated Balance Sheets.
Short-term Debt to Affiliates
Short-term debt to affiliates consists primarily of interest-bearing master notes repayablepayable on demand. Credco does not expect any changes to its short-term funding strategies with affiliates. Components of short-term debt to affiliates as of June 30, 2018March 31, 2019 and December 31, 20172018 were as follows:
Table 5: Short-term Debt to Affiliates
(Millions) | | 2018 | | | 2017 | |
AE Exposure Management Limited | | $ | 4,823 | | | $ | 4,548 | |
American Express Company | | | 2,016 | | | | ― | |
American Express Europe LLC | | | 587 | | | | 765 | |
American Express Swiss Holdings GmbH | | | 499 | | | | 444 | |
American Express Holdings Netherlands CV | | | 192 | | | | 192 | |
Accertify, Inc. | | | 54 | | | | 48 | |
Total | | $ | 8,171 | | | $ | 5,997 | |
(Millions) | | 2019 | | | 2018 | |
AE Exposure Management Limited | | $ | 5,272 | | | $ | 5,122 | |
American Express Europe LLC | | | 816 | | | | 517 | |
American Express Holdings Netherlands CV | | | 192 | | | | 192 | |
Accertify, Inc. | | | 72 | | | | 68 | |
Total | | $ | 6,352 | | | $ | 5,899 | |
Long-term Debt to Affiliates
Long-term debt to affiliates represents an unsecured amount dueconsists primarily of master note agreements with original contractual maturity dates of one year or greater and are not payable on demand. Components of long-term debt to LB Luxembourg Two S.a.r.l amounting to $265 million and $270 millionaffiliates as of June 30, 2018March 31, 2019 and December 31, 2017, respectively,2018 were as follows:
Table 6: Long-term Debt to Affiliates
(Millions) | | 2019 | | | 2018 | |
American Express Company(a) | | $ | 10,273 | | | $ | 7,240 | |
Amex Funding Management (Europe) Limited(b) | | | 308 | | | | 283 | |
Total | | $ | 10,581 | | | $ | 7,523 | |
(a) Amounts payable by December 2020.November 2023.
(b) Amounts payable by September 2021.
Service Fees to Affiliates
Credco’s affiliates do not explicitly charge Credco a service fee for the servicing of receivables purchased. Instead Credco receives a lower discount rate on the receivables purchased than would be the case if servicing fees were charged. If a servicing fee had been charged by these affiliates from which Credco purchases receivables, fees to affiliates for servicing receivables would have been approximately $130$69 million and $117$63 million for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Correspondingly, discount revenue would have increased by approximately the same amounts in these periods.
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 continuously meet expected future financing obligations and business requirements for at least a twelve-month period, even in the event it is unable to continue to raise new funds under its traditional funding programs during a substantial weakening in economic conditions. |
Funding Strategy
American Express has in place an enterprise-wide funding policy. The principal funding objective is to maintain broad and well-diversified funding sources to allow American Express, including Credco, to meet its maturing obligations, cost-effectively finance current and future asset growth in its global businesses as well as to maintain a strong liquidity profile.
Credco has historically relied on intercompany borrowings and the debt capital markets to fulfill a substantial amount of its funding needs. It has a variety of funding sources available to access the debt capital markets, including senior unsecured debentures and commercial paper. One of the principal tenets of Credco’s funding strategy is to issue debt with a wide range of maturities to distribute its refinancing requirements across future periods. Credco continues to assess its funding needs and investor demand and could change the mix of its existing sources as well as add new sources to its funding mix. Credco’s funding plan is subject to various risks and uncertainties, such as the disruption of financial markets or reductions in market capacity and demand for securities offered by Credco as well as any regulatory changes or changes in its long-term or short-term credit ratings. Many of these risks and uncertainties are beyond Credco’s control.
Credco’s funding strategy is designed, among other things, to maintain appropriate and stable unsecured debt ratings from the major credit rating agencies: Dominion Bond Rating Services (DBRS), Fitch Ratings (Fitch), Moody’s Investor Services (Moody’s) and Standard & Poor’s (S&P). Such ratings help support Credco’s access to cost-effective unsecured funding as part of its overall funding strategy.
Table 6:7: Unsecured Debt Ratings
Credit Agency | | Short-Term Ratings | | Long-Term Ratings | | Outlook |
DBRS | | R-1 (middle) | | A (high) | | Stable |
Fitch | | F1 | | A | | Stable |
| | | | | | |
Moody’s | | Prime 1Prime-1 | | A2 | | Stable |
| | | | | | |
S&P | | A-2 | | A- | | Stable |
Downgrades in the ratings of Credco’s unsecured debt could result in higher funding costs, as well as higher fees related to borrowings under its unused lines of credit. Declines in credit ratings could also reduce Credco’s borrowing capacity in the unsecured term debt and commercial paper markets. The overall level of the funding provided by Credco to other American Express affiliates is impacted by a variety of factors, among them Credco’s ratings. To the extent that Credco is subject to a higher cost of funds, whether due to an adverse ratings action or otherwise, the affiliates could continue to use, or could increase their use of, alternative sources of funding for their receivables that offer better pricing.
Short-term Funding Programs
Short-term borrowings, such as commercial paper, is defined as debt with original contractual maturity of twelve months or less. Credco’s issuance and sale of commercial paper is primarily utilized for working capital needs. The amount of short-term borrowings issued in the future will depend on Credco’s funding strategy, its needs and market conditions. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, Credco had nil and $1.2$0.8 billion, respectively, of commercial paper outstanding. The average commercial paper outstanding was $0.4$0.33 billion and $1.1$0.23 billion for the sixthree months ended June 30, 2018March 31, 2019 and the year ended December 31, 2017,2018, respectively.
Long-term Debt Programs
During 2018,the three months ended March 31, 2019, Credco hasdid not issuedissue any unsecured debt securities. Long-term debt is raised through the offering of debt securities both in and outside the United States. Long-term debt is generally defined as any debt with an original contractual maturity greater than twelve months. Credco had the following long-term debt outstanding as of June 30, 2018March 31, 2019 and December 31, 2017:2018:
Table 7:8: Long-Term Debt Outstanding
(Billions) | | 2018 | | | 2017 | |
Long-term debt outstanding (a) | | $ | 23.6 | | | $ | 24.2 | |
Average long-term debt (b) | | $ | 24.2 | | | $ | 24.3 | |
(Billions) | | 2019 | | | 2018 | |
Long-term debt outstanding (a) | | $ | 18.3 | | | $ | 20.4 | |
Average long-term debt (b) | | $ | 20.3 | | | $ | 22.8 | |
(a) | The outstanding balances include (i) unamortized discount, premium and fees, (ii) the impact of movements in exchange rates on foreign currency denominated debt and (iii) the impact of fair value hedge accounting on certain fixed-rate notes that have been swapped to floating rate through the use of interest rate swaps. |
(b) | Average long-term debt outstanding during the six and twelvethree months ended June 30, 2018March 31, 2019 and the year ended December 31, 2017,2018, respectively. |
Credco has the ability to issue debt securities under the shelf registrationsregistration statement filed with the Securities and Exchange Commission (SEC). The latest shelf registration statement filed with the SEC is for an unspecified amount of debt securities. As of both June 30, 2018March 31, 2019 and December 31, 2017,2018, Credco had $23.9$18.4 billion and $20.7 billion of debt securities outstanding, respectively, issued under the SEC registration statement. Credco may redeem from time to time certain debt securities within 31 days prior to the original contractual maturity dates in accordance with the optional redemption provisions of those debt securities.
Credco has also established a program in Australia for the issuance of debt securities of up to approximately $4.4$4.3 billion (AUD $6 billion). During the sixthree months ended June 30, 2018,March 31, 2019, no notes were issued under this program. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the entire amount of approximately $4.4$4.3 billion and $4.7$4.2 billion, respectively, of notes was available for issuance under this program and there were no outstanding notes as of such dates.
Credco also established a medium-term note program in Canada provided for the issuance of notes by American Express Canada Credit Corporation (AECCC), an indirect wholly owned subsidiary of Credco. As of June 30, 2018 and December 31, 2017, AECCC had nil and $0.5 billion, respectively, of medium-term notes outstanding under this program. AECCC’s financial results are included in the consolidated financial results of Credco.
The covenants of debt instruments issued by Credco impose the requirement that Credco maintain a minimum consolidated net worth of $50 million, which limits the amount of dividends Credco can pay to its parent. During the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, Credco did not pay any cash dividends to TRS. When considering the amount of dividends it pays, Credco takes into account the amount of capital required to maintain capital strength, support business growth and meet the expectations of debt investors. To the extent excess capital is available, it may be distributed to TRS, Credco’s parent company, via dividends. 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, provided it maintains the minimum required fixed charge coverage ratio of 1.25. As of June 30, 2018,March 31, 2019, Credco was in compliance with all restrictive covenants contained in its debt agreements.
Cautionary Note Regarding Forward-Looking Statements
Various statements have been made in this Quarterly Report on this SecondFirst Quarter 20182019 Form 10-Q 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 Securities and Exchange Commission (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 that could cause actual results to differ materially from such statements. The words “believe,” “expect,” “estimate,” “anticipate,” “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 in Credco’s Annual Report on Form 10-K for the year ended December 31, 20172018 (the 20172018 Form 10-K) and other factors described 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, the following:
· | 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; |
· | the effectiveness of Credco’s risk management policies and procedures, including Credco’s ability to accurately estimate the provisions for losses in Credco’s outstanding portfolio of Card Member receivables and Card Member loans, and operational risk; |
· | 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 regulators relating to certain credit and charge card practices; |
· | the effect of fluctuating interest rates, which could affect Credco’s borrowing costs and have an adverse effect on the market price of notes issued by Credco; |
· | the impact on American Express’ business resulting from continuing geopolitical uncertainty; |
· | the impact on American Express’ business of changes in the substantial and increasing worldwide competition in the payments industry; |
· | the impact on American Express’ business resulting from a failure in or breach of operational or security systems, processes or infrastructure, or those of third parties, including as a result of cyber attacks,cyberattacks, which could compromise the confidentiality, integrity, privacy and/or security of data, disrupt operations, reduce the use and acceptance of American Express cards and lead to regulatory scrutiny, litigation, remediation and response costs, and reputational harm; |
· | the impact on American Express’ business that could result from litigation such as class actions or proceedings brought by governmental and regulatory agencies; |
· | 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, the impact of global economic, political and other events on market capacity, Credco’s credit ratings, demand for securities offered by Credco, performance by Credco’s counterparties under its bank credit facilities and other lending facilities, and regulatory changes; and |
· | Credco’s tax rate remaining in line with current expectations, which could be impacted by, among other things, changes in interpretations and assumptions Credco has made and actions Credco may take as a result of the Tax Act, Credco’s geographic mix of income, further changes in tax laws and regulation, unfavorable tax audits and other unanticipated tax items; and the impact of accounting changes; and |
· | the implementation of legislation and additional guidance or context from the Internal Revenue Service, the U.S. Treasury Department, state and foreign taxing authorities, the Financial Accounting Standards Board or others regarding the Tax Act, and any future changes or amendments to that legislation.changes. |