Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2015

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Transition Period from          to         

Commission file No. 1-6908

AMERICAN EXPRESS CREDIT CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware				11-1988350
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)
200 Vesey Street New York, NY				10285
(Address of principal executive offices)				(Zip Code)

Registrant’s telephone number, including area code: (212) 640-2000

None

 

(Former name, former address and former fiscal year, if changed since last report.)

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER GENERAL INSTRUCTION H(2).

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

            x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

            x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

            ¨ Yes x No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class				Outstanding at August 7, 2015
Common Stock (par value $0.10 per share)				1,504,938 Shares

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

FORM 10-Q

INDEX

 

Part I.		Financial Information				Page No.
		Item 1.		Financial Statements
				Consolidated Statements of Income and Retained Earnings – Three and Six Months Ended June 30, 2015 and 2014			1
				Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2015 and 2014			2
				Consolidated Balance Sheets – June 30, 2015 and December 31, 2014			3
				Consolidated Statements of Cash Flows – Six Months Ended June 30, 2015 and 2014			4
				Notes to Consolidated Financial Statements			5
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
		Item 4.		Controls and Procedures			25
Part II.		Other Information
		Item 1A.		Risk Factors			26
		Item 5.		Other Information			26
		Item 6.		Exhibits			27
		Signatures					28
		Exhibit Index					E-1

---

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

AND RETAINED EARNINGS

(Unaudited)

 

				Three Months Ended June 30,												Six Months Ended June 30,
(Millions)					2015						2014						2015					2014
Revenues
Discount revenue earned from purchased Card Member receivables and loans				$	124					$	133					$	233					$       270
Interest income from affiliates and other					62						101						141					192
Finance revenue					7						12						14					25
Total revenues					193						246						388					487
Expenses
Provisions for losses					34						48						74					109
Interest expense					100						134						200					259
Interest expense to affiliates					2						1						4					3
Other, net					(12	)					(25	)					(29	)				(47)
Total expenses					124						158						249					324
Pretax income					69						88						139					163
Income tax provision (benefit)					20						(11	)					22					(14)
Net income					49						99						117					177
Retained earnings at beginning of period					3,047						3,004						3,015					3,004
Dividends					(24	)					(78	)					(60	)				(156)
Retained earnings at end of period				$	3,072					$	3,025					$	3,072					$    3,025

 

See Notes to Consolidated Financial Statements.

1

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

						Three Months Ended June 30,												Six Months Ended June 30,
(Millions)							2015						2014						2015					2014
Net income						$	49					$	99					$	117					$       177
Other comprehensive (loss) income:
Foreign currency translation adjustments, net of tax of: 2015, $13 and $51; 2014, $(30) and $(75)							(29	)					44						(154	)				19
Other comprehensive (loss) income							(29	)					44						(154	)				19
Comprehensive income (loss)						$	20					$	143					$	(37)					$       196

 

See Notes to Consolidated Financial Statements.

2

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Millions, except share data)				June 30, 2015						December 31, 2014
Assets
Cash and cash equivalents				$	122					$                74
Card Member receivables, less reserves: 2015, $106; 2014, $94					18,663					14,413
Card Member loans, less reserves: 2015, $4; 2014, $3					413					398
Loans to affiliates and other					11,429					15,303
Due from affiliates					1,128					2,206
Other assets					226					446
Total assets				$	31,981					$         32,840
Liabilities and Shareholder’s Equity
Liabilities
Short-term debt				$	1,811					$              769
Short-term debt to affiliates					4,463					4,334
Long-term debt					22,177					24,282
Total debt					28,451					29,385
Due to affiliates					1,053					888
Accrued interest and other liabilities					185					178
Total liabilities					29,689					30,451
Shareholder’s Equity
Common stock, $0.10 par value, authorized 3 million shares; issued and outstanding 1.5 million shares					—					—
Additional paid-in capital					161					161
Retained earnings					3,072					3,015
Accumulated other comprehensive loss:
Foreign currency translation adjustments, net of tax of: 2015, $143; 2014, $92					(941	)				(787)
Total accumulated other comprehensive loss					(941	)				(787)
Total shareholder’s equity					2,292					2,389
Total liabilities and shareholder’s equity				$	31,981					$         32,840

 

See Notes to Consolidated Financial Statements.

3

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Six Months Ended June 30 (Millions)					2015					2014
Cash Flows from Operating Activities
Net income				$	117					$      177
Adjustments to reconcile net income to net cash provided by operating activities:
Provisions for losses					74					109
Amortization of underwriting expense					11					12
Deferred taxes					9					(3)
Changes in operating assets and liabilities:
Interest, taxes and other amounts due to/from affiliates					(128	)				120
Other operating assets and liabilities					302					(106)
Net cash provided by operating activities					385					309
Cash Flows from Investing Activities
Net increase in Card Member receivables and loans					(4,470	)				(3,640)
Net decrease (increase) in loans to affiliates and other					3,578					(1,226)
Net decrease in due from affiliates					1,325					266
Net cash provided by (used in) investing activities					433					(4,600)
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt					1,042					(200)
Net increase in short-term debt to affiliates					114					920
Issuance of long-term debt					2,140					4,625
Principal payments on long-term debt					(4,004	)				(903)
Dividends paid					(60	)				(156)
Net cash (used in) provided by financing activities					(768	)				4,286
Effect of foreign currency exchange rates on cash and cash equivalents					(2	)				2
Net increase (decrease) in cash and cash equivalents					48					(3)
Cash and cash equivalents at beginning of period					74					86
Cash and cash equivalents at end of period				$	122					$        83

 

See Notes to Consolidated Financial Statements.

4

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.	Basis of Presentation

The Company

American Express Credit Corporation (Credco), together with its subsidiaries, 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). American Express charge cards and American Express credit cards are collectively referred to herein as the cards.

Credco is engaged in the business of financing non-interest-earning Card Member receivables arising from the use of the American Express^® Green Card, the American Express^® Gold Card, Platinum Card^®, Corporate Card and other American Express 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, although interest-earning revolving loans are primarily funded by subsidiaries of TRS other than Credco.

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 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 overall 1.25 fixed charge coverage ratio, which is achieved by charging appropriate discount rates on the purchases of Card Member receivables and loans 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 loans at a discount is reported as discount revenue on the Consolidated Statements of Income and Retained Earnings.

The accompanying Consolidated Financial Statements should be read in conjunction with the consolidated financial statements in Credco’s Annual Report on Form 10-K for the year ended December 31, 2014 (Form 10-K). If not materially different, certain footnote disclosures included in the Form 10-K have been omitted from this Quarterly Report on Form 10-Q.

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.

Certain reclassifications of prior period amounts have been made to conform to the current period presentation. These reclassifications did not have a material impact on Credco’s financial position, results of operations or cash flows.

Recently Issued Accounting Standards

Accounting Standards Update (ASU) No. 2014-09, Revenue Recognition (Topic 606): Revenue from Contracts with Customers was issued on May 28, 2014. The guidance establishes the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related cash flows. The guidance supersedes most of the current revenue recognition requirements, and will be effective January 1, 2018, with early adoption as of January 1, 2017, permitted. Credco continues to evaluate the impact this guidance, including the method of implementation, will have on its financial position, results of operations and cash flows, among other items.

 

5

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

2.	Card Member Receivables and Loans

American Express’ charge and lending payment card products result in the generation of Card Member receivables and Card Member loans, respectively.

The net volume of Card Member receivables purchased during the six months ended June 30, 2015 and 2014 was approximately $110 billion and $111 billion, respectively. As of June 30, 2015 and December 31, 2014, Credco Receivables Corporation (CRC) owned approximately $4.8 billion and $2.8 billion, respectively, of participation interests in Card Member receivables purchased without recourse from Receivables Financing Corporation VIII LLC (RFC VIII).

Card Member receivables as of June 30, 2015 and December 31, 2014 consisted of:

 

 

(a)

International is comprised of consumer and small business services.

 

(b)

In the first quarter of 2015, Credco restructured its Australian and New Zealand funding, resulting in an increase in Card Member receivables and related reserves with a corresponding decline in loans to affiliates.

 

(c)

Net of deferred discount revenue totaling $26 million and $16 million as of June 30, 2015 and December 31, 2014, respectively.

 

(d)

Card Member receivables modified in a troubled debt restructuring (TDR) program were immaterial.

The net volume of Card Member loans purchased during the six months ended June 30, 2015 and 2014 was $1.9 billion and $2.1 billion, respectively.

Card Member loans as of June 30, 2015 and December 31, 2014 consisted of:

 

 

(a)

Card Member loans modified in a TDR program were immaterial.

 

6

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Card Member Receivables and Loans Aging

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, 2015 and December 31, 2014:

 

2015 (Millions)		Current				30-59 Days Past Due				60-89 Days Past Due				90+ Days Past Due				Total
Card Member Receivables:
U.S. Card Services		$	4,762			$	17			$	8			$	13			$        4,800
International Card Services			2,088				9				6				10			2,113
Global Commercial Services (a)			(b	)			(b	)			(b	)			86			11,856
Card Member Loans:
International Card Services		$	414			$	1			$	1			$	1			$           417

 

2014 (Millions)		Current				30-59 Days Past Due				60-89 Days Past Due				90+ Days Past Due				Total
Card Member Receivables:
U.S. Card Services		$	2,729			$	12			$	5			$	9			$        2,755
International Card Services			1,296				8				4				8			1,316
Global Commercial Services (a)			(b	)			(b	)			(b	)			89			10,436
Card Member Loans:
International Card Services		$	399			$	1			$	—			$	1			$           401

 

(a)

For Card Member receivables in Global Commercial Services (GCS), delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Member’s billing statement date. In addition, if collection procedures are initiated on an account prior to the account becoming 90 days past billing, the associated Card Member receivable balance is classified as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes.

 

(b)

Delinquency data for periods other than 90 days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+ Days Past Due balances.

 

7

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Credit Quality Indicators for Card Member Receivables and Loans

The following tables present the key credit quality indicators as of or for the six months ended June 30:

 

		2015								2014
			Net Write-off Rate	(a)			30+ Days Past Due as a % of Total				Net Write-off Rate	(a)		30+ Days Past Due as a % of Total
Card Member Receivables:
U.S. Card Services			0.99	%			0.79	%			1.16	%		0.97%
International Card Services			1.68	%			1.18	%			1.94	%		1.58%
Card Member Loans:
International Card Services			1.03	%			0.72	%			1.19	%		1.57%
		2015								2014
			Net Loss Ratio as a % of Charge Volume	(b)			90+ Days Past Billing as a % of Receivables				Net Loss Ratio as a % of Charge Volume	(b)		90+ Days Past Billing as a % of Receivables
Card Member Receivables:
Global Commercial Services			0.07	%			0.73	%			0.07	%		0.69%

(a)	Represents the amount of Card Member receivables or Card Member loans owned by Credco that are written off, net of recoveries, expressed as a percentage of the average Card Member receivables or Card Member loans balances in each of the periods indicated.

 

(b)	Represents the amount of Card Member receivables owned by Credco that are written off, net of recoveries, expressed as a percentage of the volume of Card Member receivables purchased by Credco in each of the periods indicated.

 

8

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.	Reserves for Losses

Reserves for losses relating to Card Member receivables and 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 six months ended June 30:

 

Changes in Card Member Loans Reserve for Losses

The following table presents changes in the Card Member loans reserve for losses for the six months ended June 30:

 

 

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 rate 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 engage in derivatives for trading purposes.

In relation to Credco’s credit risk, under the terms of the derivative agreements it has with its various counterparties, Credco is not required to either immediately settle any outstanding liability balances or post collateral upon the occurrence of a specified credit risk-related event. Based on the assessment of credit risk of Credco’s derivative counterparties as of June 30, 2015 and December 31, 2014, Credco does not have derivative positions that warrant credit valuation adjustments.

 

9

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2015 and December 31, 2014:

 

					Other Assets Fair Value												Accrued Interest and Other Liabilities Fair Value
(Millions)					2015						2014						2015					2014
Derivatives designated as hedging instruments:
Interest rate contracts
Fair value hedges				$	93					$	90					$	5					$            4
Foreign exchange contracts
Net investment hedges					32						186						13					—
Total derivatives designated as hedging instruments					125						276						18					4
Derivatives not designated as hedging instruments:
Foreign exchange contracts					51						73						64					49
Total derivatives, gross					176						349						82					53
Less: Cash collateral netting (a)					(84	)					(63	)					—					—
Derivative asset and derivative liability netting (b)					(50	)					(50	)					(50	)				(50)
Total derivatives, net (c)				$	42					$	236					$	32					$            3

 

(a)    Represents the offsetting of derivative instruments and the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivative instrument(s) executed with the same counterparty under an enforceable master netting arrangement. From time to time, Credco also receives non-cash collateral from counterparties in the form of security interests in U.S. Treasury securities, which reduces Credco’s risk exposure, but does not reduce the net exposure on Credco’s Consolidated Balance Sheets. Credco had such non-cash collateral as of December 31, 2014, with a fair value of $40 million, none of which was sold or repledged. Credco did not have any such non-cash collateral as of June 30, 2015. Additionally, Credco posted $103 million and $91 million as of June 30, 2015 and December 31, 2014, 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.
(b)    Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparty under an enforceable master netting arrangement.
(c)    Credco has no individually significant derivative counterparties and therefore, no significant risk exposure to any single derivative counterparty. The total net derivative assets and derivative liabilities are presented within Other assets and Accrued interest and other liabilities on Credco’s Consolidated Balance Sheets.

A majority of Credco’s derivative assets and liabilities as of June 30, 2015 and December 31, 2014 are subject to master netting agreements with its derivative counterparties. In addition, Credco has no derivative amounts subject to enforceable master netting arrangements that are not offset on Credco’s Consolidated Balance Sheets.

Fair Value Hedges

Credco is exposed to interest rate risk associated with its fixed-rate long-term debt. Credco uses interest rate swaps to economically convert certain fixed-rate debt obligations to floating-rate obligations at the time of issuance. As of June 30, 2015 and December 31, 2014, Credco hedged $15.2 billion and $14.7 billion, respectively, of its fixed-rate debt to floating-rate debt using interest rate swaps.

 

10

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table summarizes the impact on the Consolidated Statements of Income and Retained Earnings associated with Credco’s fair value hedges for the three and six months ended June 30:

 

Three Months Ended June 30: (Millions)
		Gains (losses) recognized in income
		Derivative contract										Hedged item										Net hedge
				Amount										Amount								ineffectiveness
Derivative relationship		Income Statement Line Item			2015				2014			Income Statement Line Item			2015				2014				2015			2014
Interest rate contracts		Other expenses		$	(45)			$	(6)			Other expenses		$	45			$	10			$	—			$     4

 

Six Months Ended June 30: (Millions)
		Gains (losses) recognized in income
		Derivative contract										Hedged item										Net hedge
				Amount										Amount								ineffectiveness
Derivative relationship		Income Statement Line Item			2015				2014			Income Statement Line Item			2015				2014				2015			2014
Interest rate contracts		Other expenses		$	3			$	(42)			Other expenses		$	1			$	47			$	4			$     5

Credco also recognized a net reduction in interest expense on long-term debt of $44 million and $50 million for the three months ended June 30, 2015 and 2014, respectively, and $86 million and $95 million for the six months ended June 30, 2015 and 2014, respectively, primarily related to the net settlements (interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.

Net Investment Hedges

The effective portion of the gain or (loss) on net investment hedges, net of taxes, recorded in Accumulated Other Comprehensive Loss as part of the cumulative translation adjustment, was $22 million and $(50) million for the three months ended June 30, 2015 and 2014, respectively, and $85 million and $(126) million for the six months ended June 30, 2015 and 2014, respectively, with any ineffective portion recognized in Other expenses during the period of change. During the three and six months ended June 30, 2015 and 2014 no ineffectiveness was recognized in either of these two periods.

The following table summarizes the impact on the Consolidated Statements of Income and retained earnings associated with Credco’s derivatives not designated as hedges for the three and six months ended June 30:

 

				Pretax (losses) gains
				Three Months Ended June 30,								Six Months Ended June 30,
				Amount								Amount
Description (Millions)		Income Statement Line Item			2015				2014				2015			2014
Foreign exchange contracts		Other expenses		$	(17)			$	(58)			$	(31)			$     63
Total				$	(17)			$	(58)			$	(31)			$     63

 

11

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

5.	Fair Values

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 valuation hierarchy as Level 2, as of June 30, 2015 and December 31, 2014:

 

 

 

 

12

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Nonrecurring Fair Value Measurements

During the six months ended June 30, 2015 and during the year ended December 31, 2014, Credco did not have any assets that were measured at fair value due to impairment on a nonrecurring basis.

 

6.	Variable Interest Entity

Credco has established a Variable Interest Entity (VIE), American Express Canada Credit Corporation (AECCC), used primarily to loan funds to affiliates, through the issuance of notes in Canada under a medium-term note program. All notes issued under this 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 in accordance with accounting guidance governing consolidation of VIEs. Total assets as of June 30, 2015 and December 31, 2014 were $1.9 billion and $2.1 billion, respectively, the majority of which were eliminated in consolidation. Total liabilities as of June 30, 2015 and December 31, 2014 were $1.9 billion and $2.0 billion, respectively. As of June 30, 2015 and December 31, 2014, $910 million and $969 million, respectively, of liabilities were eliminated in consolidation. The assets of the VIE are not used solely to settle the obligations of the VIE. The note holders of the VIE have recourse to Credco.

 

13

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

7.	Changes In Accumulated Other Comprehensive Loss

Accumulated Other Comprehensive Loss 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 each component for the three and six months ended June 30, 2015 and 2014 were as follows:

 

 

 

 

No amounts were reclassified out of Accumulated Other Comprehensive Loss into the Consolidated Statements of Income and Retained Earnings for the three and six months ended June 30, 2015 and 2014.

 

14

---

Table of Contents

AMERICAN EXPRESS CREDIT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.	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.

American Express is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which American Express has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The IRS has completed its field examination of American Express’ federal tax returns for years through 2007; however, refund claims for those years continue to be reviewed by the IRS. In addition, American Express is currently under examination by the IRS for the years 2008 through 2011.

Credco believes it is reasonably possible that its unrecognized tax benefits could decrease within the next 12 months by as much as $287 million 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 deductibility of certain expenses or losses and the attribution of taxable income to a particular jurisdiction or jurisdictions. Of the $287 million of unrecognized tax benefits, approximately $285 million relates to amounts that, if recognized, would be recorded to shareholder’s equity and would not impact Credco’s results of operations or the effective tax rate.

The effective tax rates were 28.9 percent and 15.8 percent for the three and six months ended June 30, 2015, respectively, and (12.5) percent and (8.6) percent for the three and six months ended June 30, 2014, respectively. The tax rate in each of the periods reflects the geographic mix of expenses in the United States attracting a 35 percent statutory benefit and foreign earnings taxed at lower rates, which are indefinitely reinvested. In addition, the effective tax rates for each of the periods reflect the impact of certain prior years’ tax items, including those noted below.

The results for the three months ended June 30, 2015 reflect out-of-period corrections that increased tax expense by $16.7 million. The corrections relate to tax calculations of foreign exchange gains/losses in one jurisdiction reflected in the 2014 and Q1 2015 results. The results for the six months ended June 30, 2015 reflect out-of-period corrections that increased tax expense by $11 million. The corrections relate to tax calculations of foreign exchange gains/losses in one jurisdiction reflected in the 2014 results. None of the current or prior period financial statements were materially misstated from these corrections.

The tax rate in each of the periods reflects 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 calculated for each interim period.

 

15

---

Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

American Express Credit Corporation (Credco), together with its subsidiaries, 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 non-interest-earning Card Member receivables arising from the use of the American Express^® Green Card, the American Express^® Gold Card, Platinum Card^®, Corporate Card and other American Express 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, although interest-earning 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 cards.

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.

Current Business Environment/Outlook

Management’s discussion of the results of Credco is in the context of the following wider business environment for American Express.

American Express’ results for the second quarter of 2015 reflected higher spending by its Card Members, growth in average Card Member loans, which drove higher net interest income, and disciplined expense control. Credit quality indicators were again at or near historically low levels. Consistent with recent quarters, American Express’ results this quarter were adversely affected by the significant impact of a stronger U.S. dollar on international operations.

While American Express’ business is diversified by product and geography, including a range of consumer and commercial card offerings, a large international business and GNS partners around the world, all of which American Express believes provide a range of growth opportunities, it faces a number of challenges throughout the remainder of 2015 and 2016.

Global economic growth remains uneven. In addition, American Express’ results continued to be significantly impacted by the strengthening U.S. dollar, and it expects foreign exchange will have an adverse impact for the remainder of 2015. American Express’ results could also be adversely affected by increases in interest rates and U.S. income tax law changes.

Competition also remains extremely intense across the payments industry. Within the co-brand space, more intense competition has generally led to increased cost in its renewed co-brand partnerships. For the remainder of 2015, American Express expects to see a continued impact of these renegotiated relationships.

As previously disclosed, a trial court ruled in favor of the U.S. Department of Justice (DOJ) in its antitrust lawsuit against American Express. Following the decision, on April 30, 2015 the trial court issued an injunction requiring American Express to change the provisions in its agreements with merchants accepting American Express cards in the U.S. that prohibit merchants from engaging in various actions to encourage Card Members to use other credit or charge card products or networks. The injunction became effective on July 20, 2015. American Express is vigorously pursuing an appeal of the decision and judgment. See Part II, Item 1A, “Risk Factors” for additional information on the potential impacts of the adverse decision and injunction on American Express’ business.

Results of Operations for the Six Months Ended June 30, 2015 and 2014

Pretax income depends primarily on the volume of Card Member receivables and loans purchased, the discount factor used to determine purchase price, interest earned, interest expense and collectability of Card Member receivables and loans purchased.

Credco’s consolidated net income decreased 34 percent or $60 million for the six months ended June 30, 2015 as compared to the same period in the prior year. The year-over-year decrease is primarily due to lower interest income from affiliates and other, lower discount revenues earned from purchased Card Member receivables and loans, higher income tax expense and lower finance revenue, partially offset by lower interest expense and lower provision for losses. The following table summarizes the changes for the six months ended June 30:

 

16

---

Table of Contents

Table 1: Changes Attributable to the Increase (Decrease) in Key Revenue and Expense Accounts

 

(Millions)		2015				2014
Discount revenue earned from purchased Card Member receivables and loans:
Volume of receivables and loans purchased		$	(2	)		$             10
Discount rates			(35	)		(37)
Total		$	(37	)		$            (27)
Interest income from affiliates and other:
Average loans to affiliates and other		$	29			$             10
Interest rates			(80	)		(38)
Total		$	(51	)		$            (28)
Finance revenue:
Average Card Member loans outstanding		$	(6	)		$               2
Interest rates			(5	)		1
Total		$	(11	)		$               3
Interest expense:
Average debt outstanding		$	15			$               4
Interest rates			(74	)		(66)
Total		$	(59	)		$            (62)

Discount revenue earned from purchased Card Member receivables and loans

Discount revenue decreased 14 percent or $37 million to $233 million for the six months ended June 30, 2015, as compared to the same period in the prior year, primarily driven by a 3 basis points decrease in the discount rate charged on Card Member receivables and loans and a 1 percent or $1 billion decrease in the net volume of purchased receivables and loans, which were $112 billion for the six months ended June 30, 2015.

Interest income from affiliates and other

Interest income from affiliates and other decreased 27 percent or $51 million to $141 million for the six months ended June 30, 2015, as compared to the same period in the prior year, primarily driven by a decrease of 112 basis points in the annualized effective interest rate charged to affiliates and other to 1.95 percent, partially offset by an increase in the average loan balances with affiliates and other by 15 percent or $1.9 billion to $14.4 billion.

Finance revenue

Finance revenue decreased 44 percent or $11 million to $14 million for the six months ended June 30, 2015, as compared to the same period in the prior year, primarily driven by a decrease in the average Card Member loan balance outstanding for the six months ended June 30, 2015 to $388 million as compared to $505 million for the same period in the prior year.

Provisions for losses

Provisions for losses decreased 32 percent or $35 million to $74 million for the six months ended June 30, 2015, as compared to the same period in the prior year, primarily driven by a reserve release versus a reserve build in the prior year and lower net write-offs during the six months ended June 30, 2015.

Interest expense

Interest expense decreased 23 percent or $59 million to $200 million for the six months ended June 30, 2015, as compared to the same period in the prior year, primarily driven by a decrease in annualized effective interest rates on average debt outstanding by 60 basis points to 1.63 percent, partially offset by an increase in the average debt outstanding by 6 percent or $1.4 billion to $24.6 billion.

 

17

---

Table of Contents

Other, net

The benefit recorded in Other, net decreased $18 million to a benefit of $29 million for the six months ended June 30, 2015, from a benefit of $47 million for the same period in the prior year, primarily driven by a $14 million decrease in the forward points gain generated by foreign exchange forward contracts and a decrease in the fair value hedge ineffectiveness gain by $1 million. Credco uses foreign exchange forward contracts to manage foreign exchange risk for certain cross-currency funding activities. At inception, the difference between the spot rate and the contractual forward rate, referred to as the forward points, generates gains (or losses) as a component of the derivative contract’s valuation.

Income taxes

The effective tax rates for the six months ended June 30, 2015 and 2014 were 15.8 percent and (8.6) percent, respectively. The results for the six months ended June 30, 2015 reflect out-of-period corrections that increased tax expense by $11 million. The corrections relate to tax calculations of foreign exchange gains/losses in one jurisdiction reflected in the 2014 results. None of the current or prior period financial statements were materially misstated from these corrections.

The tax rates in each of the periods primarily reflect the favorable impact of the tax benefit related to Credco’s ongoing funding activities outside the United States as well as the impact of prior years’ tax items.

Card Member Receivables and Card Member Loans

As of June 30, 2015 and December 31, 2014, Credco owned $18.8 billion and $14.5 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 the participation interests from American Express Receivable Financing Corporation VIII (RFC VIII) in conjunction with TRS’ securitization program. As of June 30, 2015 and December 31, 2014, CRC owned approximately $4.8 billion and $2.8 billion, respectively, of such participation interests.

On March 19, 2015, Credco implemented a restructuring of the financing arrangements of American Express’ Australian and New Zealand card businesses to enhance funding flexibility and effectiveness. The former financing arrangement, through collateralized loans to the affiliate, has now been replaced by an arrangement where Credco purchases the Charge Card receivables from the affiliate, and continues to provide collateralized loans to fund the lending portfolios

As of June 30, 2015 and December 31, 2014, Credco owned gross Card Member loans totaling $417 million and $401 million respectively. These loans 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 or for the six months ended June 30.

 

18

---

Table of Contents

Table 2: Selected Information Related to Card Member Receivables

 

(Millions, except percentages and where indicated)			2015			2014
Total gross Card Member receivables (a)(b)(c)		$	18,769			$      18,106
Loss reserves – Card Member receivables (a)(c)		$	106			$           104
Loss reserves as a % of receivables			0.56	%		0.57%
Average life of Card Member receivables (# in days) (d)			29			29
U.S. Card Services gross Card Member receivables (a)		$	4,800			$        5,068
30 days past due as a % of total			0.79	%		0.97%
Average receivables		$	3,820			$        4,652
Write-offs, net of recoveries		$	19			$             27
Net write-off rate (e)			0.99	%		1.16%
International Card Services gross Card Member receivables (a)(c)		$	2,113			$        1,264
30 days past due as a % of total			1.18	%		1.58%
Average receivables		$	1,670			$        1,236
Write-offs, net of recoveries		$	14			$             12
Net write-off rate (e)			1.68	%		1.94%
Global Commercial Services gross Card Member receivables (a)(c)		$	11,856			$      11,774
90 days past billing as a % of total			0.73	%		0.69%
Write-offs, net of recoveries		$	51			$             53
Net loss ratio (f)			0.07	%		0.07%

 

(a)	Refer to Notes 2 and 3 to the Consolidated Financial Statements for further discussion.

 

(b)	In the third quarter of 2014, Credco terminated its agreements to purchase Card Member receivables from the American Express joint ventures that issue American Express cards in certain countries (the American Express joint ventures).

 

(c)	In the first quarter of 2015, Credco restructured its Australian and New Zealand funding, resulting in an increase in Card Member receivables and related reserves with a corresponding decline in loans to affiliates.

 

(d)	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 period indicated, to the volume of Card Member receivables purchased by Credco.

 

(e)	Represents the amount of Card Member receivables owned by Credco that are written off, net of recoveries, expressed as a percentage of the average Card Member receivables in each of the periods indicated.

 

(f)	Represents the amount of Card Member receivables owned by Credco that are written off, net of recoveries, expressed as a percentage of the volume of Card Member receivables purchased by Credco in each of the periods indicated.

 

19

---

Table of Contents

Loans to Affiliates and Other

Credco’s loans to affiliates and other represent floating-rate interest-bearing borrowings by other wholly owned subsidiaries of TRS and the American Express joint ventures. The components of loans to affiliates and other as of June 30, 2015 and December 31, 2014 were as follows:

Table 3: Loans to Affiliates and Other

 

(Millions)		2015				2014
American Express Company		$	3,796			$          5,937
American Express Services Europe Limited			3,135			3,075
Amex Bank of Canada			2,282			2,581
American Express Australia Limited (a)			1,160			2,693
American Express Company (Mexico) S.A. de C.V.			479			495
American Express Bank (Mexico) S.A.			370			382
American Express International, Inc.			106			100
American Express International (NZ) Inc. (a)			101			—
Amex (Saudi Arabia) Limited			—			28
Alpha Card S.C.R.L./C.V.B.A.			—			12
Total (b)		$	11,429			$        15,303

 

(a)	In the first quarter of 2015, Credco restructured its Australian and New Zealand funding, resulting in an increase in Card Member receivables and related reserves with a corresponding decline in loans to affiliates.

 

(b)

As of June 30, 2015, approximately $3.8 billion of total loans to affiliates and other were collateralized by the underlying Card Member receivables and Card Member loans transferred with recourse and the remaining $7.6 billion were uncollateralized loans primarily to affiliated banks, American Express Company and American Express joint ventures. As of December 31, 2014, approximately $5.2 billion of total loans to affiliates and other were collateralized by the underlying Card Member receivables transferred with recourse and the remaining $10.1 billion were uncollateralized loans primarily to affiliated banks and American Express Company.

Due from/to Affiliates

As of June 30, 2015 and December 31, 2014, amounts due from affiliates were $1.1 billion and $2.2 billion, respectively. As of June 30, 2015 and December 31, 2014, amounts due to affiliates were $1.1 billion and $0.9 billion, respectively. These amounts relate primarily to timing differences from the purchase of Card Member receivables, net of remittances from TRS, as well as from other operating activities.

Short-term Debt to Affiliates

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, 2015 and December 31, 2014 were as follows:

Table 4: Short-term Debt to Affiliates

 

(Millions)		2015				2014
AE Exposure Management Ltd.		$	2,962			$        2,851
American Express Europe LLC			793			831
American Express Swiss Holdings			407			403
American Express Holdings (Netherlands) C.V.			189			188
Amex Funding Management (Europe) Limited			112			61
Total		$	4,463			$        4,334

 

20

---

Table of Contents

Service Fees to Affiliates

Certain affiliates do not explicitly charge Credco a servicing fee for the servicing of receivables purchased. Instead Credco receives a lower discount rate on the receivables sold to Credco 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 $121 million¹ and $66 million for the six months ended June 30, 2015 and 2014, 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 12-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. The diversity of funding sources by type of instrument, by maturity and by investor base, among other factors, provides additional insulation from the impact of disruptions in any one type of instrument, 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.

Credco, like many financial services companies, has historically relied on 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 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 5: 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-1		A2		Stable
S&P		A-2		A-		Stable

 

 

¹ Beginning the third quarter of 2014, Credco has enhanced the methodology to estimate the service fees applicable on the Card Member receivables and loans portfolio purchased.

 

21

---

Table of Contents

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

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, 2015 and December 31, 2014, Credco had $1.8 billion and $0.8 billion, respectively, of commercial paper outstanding. The average commercial paper outstanding was $0.5 billion and $0.2 billion for the six months ended June 30, 2015 and the year ended December 31, 2014, respectively.

Long-term Debt Programs

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 maturity greater than 12 months. Credco had the following long-term debt outstanding as of June 30, 2015 and December 31, 2014.

Table 6: Long-term Debt Outstanding

 

(Billions)			2015			2014
Long-term debt outstanding		$	22.2			$        24.3
Average long-term debt (a)		$	24.1			$        24.2

 

(a)	Average long-term debt outstanding during the six and twelve months ended June 30, 2015 and December 31, 2014, respectively.

During the second quarter of 2015, Credco issued $2.15 billion of dual-tranche senior unsecured notes with a maturity of five years consisting of $1.75 billion of fixed-rate senior notes with a coupon of 2.375 percent and $400 million of floating-rate senior notes at a rate of 3-month LIBOR plus 73 basis points.

Credco has the ability to issue debt securities under shelf registrations 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 June 30, 2015 and December 31, 2014, Credco had $19 billion and $19.6 billion, respectively, of debt securities outstanding, issued under the SEC registration statement.

Credco has established a program for the issuance of debt instruments outside the United States, which is listed on the Luxembourg Stock Exchange. The prospectus for this program expired in February 2013. Credco expects to renew the prospectus as management deems appropriate. As of both June 30, 2015 and December 31, 2014, no debt instruments were outstanding under this program.

Credco has also established a program in Australia for the issuance of debt securities of up to approximately $4.6 billion (AUD $6.0 billion). During the six months ended June 30, 2015, no notes were issued under this program. As of June 30, 2015 and December 31, 2014, the entire amount of approximately $4.6 billion and $4.9 billion, respectively, of notes were available for issuance under this program and the outstanding notes were nil as of such dates.

Credco has also established a medium-term note program in Canada providing for the issuance of notes by American Express Canada Credit Corporation (AECCC), an indirect wholly owned subsidiary of Credco. The prospectus for this program expired in September 2014. Credco expects to renew the prospectus as management deems appropriate. All notes issued by AECCC under this program are guaranteed by Credco. For the six months ended June 30, 2015, no notes were issued under this program. As of June 30, 2015 and December 31, 2014, AECCC had $0.9 billion and $1.0 billion, respectively, of medium-term notes outstanding under this program. The financial results of AECCC are included in the consolidated financial results of Credco.

 

22

---

Table of Contents

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 six months ended June 30, 2015 and 2014, Credco paid $60 million and $156 million, respectively, of 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, 2015, Credco was in compliance with all restrictive covenants contained in its debt agreements.

Liquidity Management

General principles and the overall framework for managing liquidity risk across American Express on an enterprise-wide basis are set out in American Express’ Liquidity Risk Policy. The liquidity objective is to maintain access to a diverse set of on- and off- balance sheet liquidity sources. American Express and its subsidiaries, including Credco, maintain liquidity sources in amounts sufficient to meet business requirements and expected future financial obligations for a period of at least twelve months, in the event they are unable to raise new funds under their regular funding programs during a substantial weakening in economic conditions.

Credco manages this objective by regularly accessing capital through its various funding programs, as well as by maintaining a variety of contingent sources of cash and financing, such as access to securitizations of Card Member receivables through sales of receivables to TRS for securitization by RFC VIII and the American Express Issuance Trust II, as well as committed bank facilities.

American Express, including Credco, incurs and accepts liquidity risk arising in the normal course of its activities. This liquidity risk exposure can arise from a variety of sources, and thus the enterprise-wide liquidity management strategy includes a variety of parameters, assessments and guidelines, including, but not limited to:

 

•

Maintaining a diversified set of funding sources;

 

•

Maintaining unencumbered liquid assets and off-balance sheet liquidity sources available to meet obligations;

 

•

Projecting cash inflows and outflows from a variety of sources and under a variety of scenarios; and

 

•

Incorporating tradeoffs between the risk of insufficient liquidity and profitability into its capital adequacy framework.

As of June 30, 2015, Credco had cash and cash equivalents of approximately $122 million. In addition to its actual holdings of cash and cash equivalents, Credco maintains access to additional liquidity, in the form of cash and cash equivalents held by certain affiliates, through intercompany loan agreements.

Committed Bank Credit Facilities

Credco maintained committed syndicated bank credit facilities as of June 30, 2015 of $6.5 billion through facilities in the U.S. and Australia, of which the amount outstanding (drawn) was $2.2 billion. Credco’s total committed bank credit facilities expire as follows:

Table 7: Expiration of Committed Syndicated Bank Credit Facilities

 

(Billions)
2016		$            1.9
2017		4.6
Total		$            6.5

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 earnings to fixed charges. The ratio of earnings to fixed charges for Credco was 1.68 for the six months ended June 30, 2015. The ratio of earnings to combined fixed charges and preferred stock dividends for American Express for the six months ended June 30, 2015 was 6.25.

 

23

---

Table of Contents

The committed bank credit facilities do not contain material adverse change clauses, which might otherwise preclude borrowing under the credit facilities, nor are they dependent on Credco’s credit rating.

Cautionary Note Regarding Forward-Looking Statements

Various statements have been made in this Quarterly Report on this Second Quarter 2015 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,” “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 in Credco’s Annual Report on Form 10-K for the year ended December 31, 2014 (the 2014 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:

 

•

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 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 bank regulators relating to certain credit and charge card practices and other payment systems regulations;

 

•

the effect of fluctuating interest rates, which could affect Credco’s borrowing costs;

 

•

the impact on American Express’ business resulting from changes in global economic and business conditions, including increased competition in the payments industry, particularly in co-brand partnerships;

 

•

the impact on American Express’ business that could result from litigation such as class actions or proceedings brought by governmental and regulatory agencies (including the lawsuit filed against American Express by the U.S. Department of Justice and certain states’ attorneys general);

 

•

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

 

•

the potential failure of the U.S. Congress to renew legislation regarding the active financing exception to Subpart F of the Internal Revenue Code, which could increase Credco’s effective tax rate and have an adverse impact on net income.

 

24

---

Table of Contents

ITEM 4.

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 and designed to ensure that the information required to be disclosed in Credco’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Credco’s management, including Credco’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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 fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Credco’s internal control over financial reporting.

 

25

---

Table of Contents

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

This section supplements and updates certain of the information found under Part I, Item 1A. “Risk Factors” of Credco’s 2014 Form 10-K and should be read in conjunction with the discussion of risk factors set forth in such section. Based on the information currently known, Credco believes that the matter discussed below, together with the risk factors set forth in the 2014 Form 10-K, identify the most significant risk factors affecting Credco. However, the risks and uncertainties that Credco faces are not limited to those described below and those set forth in the 2014 Form 10-K. Additional risks and uncertainties not presently known to Credco or that it currently believes to be immaterial may also adversely affect Credco’s business.

Ongoing legal proceedings regarding provisions in American Express’ merchant contracts could have a material adverse effect on American Express’ business, result in additional litigation and/or arbitrations, subject American Express to substantial monetary damages and damage its reputation and brand.

The DOJ and certain states’ attorneys general brought an action against American Express alleging that the provisions in American Express’ card acceptance agreements with merchants that prohibit merchants from discriminating against American Express’ card products at the point of sale violate the U.S. antitrust laws. Visa and MasterCard, which were also defendants in the DOJ and state action, entered into a settlement agreement and have been dismissed as parties pursuant to that agreement, which was approved by the court. The settlement enjoins Visa and MasterCard from entering into contracts that prohibit merchants from engaging in various actions to steer cardholders to other card products or payment forms at the point of sale. On February 19, 2015, the trial court found that the challenged provisions in American Express card acceptance agreements were anticompetitive and on April 30, 2015 issued an injunction prohibiting American Express from enforcing certain elements of such provisions. The trial and appellate courts denied American Express’ request for a stay of the injunction and the injunction became effective on July 20, 2015. As a result, American Express’ card products are exposed to the possibility of increased merchant steering and other forms of discrimination that could impair the Card Member experience during the pendency of American Express’ appeal and potentially thereafter. American Express is vigorously pursuing an appeal of the decision and judgment. In addition, American Express is a defendant in a number of actions and arbitration proceedings, including proposed class actions, filed by merchants that challenge the non-discrimination and honor-all-cards provisions in American Express’ card acceptance agreements and seek damages. In December 2013, American Express agreed to settle the merchant class actions and the settlement agreement has been preliminarily approved by the court. There can be no assurance that the court will grant final approval of the settlement agreement, which can be impacted by objections to the settlement agreement by plaintiffs and other parties, as well as by the appeals process in the DOJ case.

The adverse decision and injunction in the DOJ case and future adverse outcomes in these proceedings against American Express (including an adverse final judgment following appeal in the DOJ case) could have a material adverse effect on American Express’ business, result in additional litigation and/or arbitrations, subject American Express to substantial monetary damages and damage its reputation and brand and affect Credco’s business of funding American Express card receivables and revolving loans.

 

ITEM 5.

OTHER INFORMATION

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted outside the United States by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

During the second quarter of 2015, American Express Global Business Travel booked one hotel reservation at Homa Hotel Tehran. In addition, certain third-party service providers obtained approximately five visas from Iranian embassies and consulates around the world during the second quarter of 2015 in connection with certain travel arrangements on behalf of American Express Global Business Travel clients. American Express Global Business Travel had negligible gross revenues and net profits attributable to these transactions. American Express Global Business Travel believes these transactions were permissible pursuant to certain exemptions from U.S. sanctions for travel-related transactions under the International Emergency Economic Powers Act, as amended. American Express Global Business Travel has informed American Express that it intends to continue to engage in these activities on a limited basis so long as such activities are permitted under U.S. law.

 

26

---

Table of Contents

A travel company that may be considered an affiliate of Credco, American Express Nippon Travel Agency, Inc. (Nippon Travel Agency), has informed American Express that during the second quarter of 2015 it obtained 13 visas from the Iranian embassy in Japan in connection with certain travel arrangements on behalf of clients. Nippon Travel Agency had negligible gross revenues and net profits attributable to these transactions. Nippon Travel Agency has informed American Express that it intends to continue to engage in this activity so long as such activity is permitted under U.S. law.

 

ITEM 6.

EXHIBITS

The exhibits required to be filed with this report are listed on page E-1 hereof, under “Exhibit Index,” which is incorporated herein by reference.

 

27

---

Table of Contents

SIGNATURES

Pursuant to the requirements 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: August 7, 2015							By			/s/ David L. Yowan
										David L. Yowan
										Chief Executive Officer
Date: August 7, 2015							By			/s/ David L. Fabricant
										David L. Fabricant
										Vice President and Chief Accounting Officer

 

28

---

Table of Contents

EXHIBIT INDEX

Pursuant to Item 601 of Regulation S-K

 

Exhibit No.				Description				How Filed
4(a)				Form of Permanent Global Registered Fixed Rate Medium-Term Senior Note, Series F.				Incorporated by reference to Exhibit 4(i) to Registrant’s Registration Statement on Form S-3 dated May 13, 2015 (File No. 333-204124).
4(b)				Form of Permanent Global Registered Floating Rate Medium-Term Senior Note, Series F.				Incorporated by reference to Exhibit 4(j) to Registrant’s Registration Statement on Form S-3 dated May 13, 2015 (File No. 333-204124).
12.1				Computation in Support of Ratio of Earnings to Fixed Charges of American Express Credit Corporation.				Electronically filed herewith.
12.2				Computation in Support of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends of American Express Company.				Electronically filed herewith.
31.1				Certification of David L. Yowan, Chief Executive Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.				Electronically filed herewith.
31.2				Certification of Anderson Y. Lee, Chief Financial Officer, pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.				Electronically filed herewith.
32.1				Certification of David L. Yowan, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				Electronically filed herewith.
32.2				Certification of Anderson Y. Lee, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				Electronically filed herewith.
101.INS				XBRL Instance Document				Electronically filed herewith.

 

E-1

---

Table of Contents

101.SCH				XBRL Taxonomy Extension Schema Document				Electronically filed herewith.
101.CAL				XBRL Taxonomy Extension Calculation Linkbase Document				Electronically filed herewith.
101.DEF				XBRL Taxonomy Extension Definition Linkbase Document				Electronically filed herewith.
101.LAB				XBRL Taxonomy Extension Label Linkbase Document				Electronically filed herewith.
101.PRE				XBRL Taxonomy Extension Presentation Linkbase Document				Electronically filed herewith.

 

E-2