Case Study-AW207 Online Services
Source: Capital Markets Coursepack
The case of “Lehman Brothers and the Securitization of American Express Charge-Card Receivables” presents complex issues of corporate funding strategy through the use of the capital markets. In the period under discussion American Express was expanding its charge card business and establishing new approaches to the financing of the business. As a major financial services company American Express depended on the capital markets for its most fundamental raw material – inexpensive money – to support its needs for liquidity and profitability.
The case examines the process of determination of the best alternatives and provides a perspective of the interplay of corporate and market processes. As another major theme the case illuminates the interplay of corporate/investment banker relationships. In this situation this relationship is especially interesting because of the affiliated relationship of the investment bank, Lehman Brothers, and the corporate client, American Express Travel Related Services (TRS). The case reviews the efforts to deal with difficult choices and the alternatives available in the capital markets. It illuminates a number of issues in the process of corporate access to the capital markets and in the responsibilities of an investment-banking advisor in facilitating this access.
The case focuses on three primary participants
1. The Company – American Express Travel Related Services (TRS)
2. Affiliated Investment Bank – Lehman Brothers
3. The Rating Agencies
Three aspects in the situation are highlighted
1. Intracorporate relationship: Lehman and TRS
2. The rating process
3. Marketing and pricing
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The student should address the following
1. Corporate Analysis – consider the special relationship between Lehman and TRS. This created an unusual dynamic between the company and its investment banker. What expectations would follow within American Express from this relationship? How would the client /corporate interaction be affected? What are the advantages/disadvantages compared to the normal arms-length selection of an investment bank in a very competitive process? What are the implications in the deal process and the positives and negatives? Would you have retained Lehman for the assignment? Explain.
2. Situation Analysis – review TRS funding needs the distribution of the receivables in terms of risk and client profile, and the objectives for TRS in this effort. Evaluate and discuss the factors you find of importance.
3. Structure – explain and evaluate the differences in the securitization of charge card receivables vs. credit card receivables.
4. Agency Rating Processes – review and discuss the tradeoffs in the acquisition of a superior rating. What are the critical factors in the rating decision? Recommend any alternatives in the rating evaluation situation which may have better served TRS interests. Present your view on the role of the rating authorities and the enhancement of the effort to establish the best relationship and results with the agencies.
5. Marketing – comment on the considerations Lehman advised and pursued in the marketing of the securities. Review the principal factors of marketing strategy and the structure of the securitization package to enhance market acceptance.
6. Strategic Evaluation – do you believe TRS interests were served best by the secuitization approach? Compare to other alternatives in the capital markets.
7. How would a straight issuance of debt by TRS or American Express compared to the path taken by Lehman/TRS? Provide your rating (1-10; A to F) of the performance of Lehman and TRS.
For this assignment you may draw on relevant information outside of the case. Delivery of the class presentation should be in the format you find most effective. Assume you are a corporate working group preparing for the presentation and provide the delivery which you believe bests serves your viewpoint and leads to successful recognition of your efforts.
Product code: Case Study-AW207
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