American Express Securitization Essay

640 words - 3 pages

PAGE PAGE 3
FNCE 738Amex CaseApril 7, 2008Andrew AhnJarrett EpsteinElizabeth LambosScott LitvinoffAvery SheffieldMatt UlmanFor the "stress test" of the securitization we assumed that A would be paid an interest rate that was the average spread for AAA securities over the five year treasury rate. For B it was assumed that the credit spread would be twice that of A. Additional assumptions taken from Exhibit 13 and various notes in the case are summarized in the following table.

high

low

5 year note rate

6.40%

yield spread on A tranche

0.525%

0.375%

monthly rate on a tranche

0.560%

0.548%

monthly interest payments to A (millions)

5.5954

5.4778

yield spread on B tranche

1.050%

0.750%

monthly rate on a tranche

0.601%

0.577%

monthly interest payments to B (millions)

0.21021

0.20200

base case

75% increase

average life of recievable (days)

46.75

81.82

payment rate

71.50%

40.86%

payments per month for A and B

740.025

422.8714286

cash collected from payments

22.20075

12.68614286

base case

75% increase

monthly default rate

0.0830%

0.1447%

estimated default amount (total)

2.073845286

3.616913545

amount borne by "investor interest"

0.858571948

1.497402208

monthly servicing cost

1.709386647

2.971380174

total costs before interest

2.567958596

4.468782382

monthly interest to A and B (average)

5.74

5.74

For the three scenarios in the prompt, it seems as though that in each scenario there will still be cash left over in excess of the reserve amount for each of the scenarios in isolation as well as if all three adverse shocks occurred at the same time.The effect of the time to service receivables increasing would primarily be to decrease both the total cash spent by the master trust on new receivables during the period, as well as the cash put aside in the "yield component". Depending on whether the "yield component" was drawn down every period or not, an increase in the length of time to service the receivable would reduce the amount of cash reserve the Master Trust has available to pay securities A and B in the event of larger than expected increase in defaults or reduction in credit card volume in the following period. However, for the sake of our "back of the envelope" analysis, we ignored the effect...

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