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To allocate gains and losses arising in connection with
Colgate debt instruments in the partnership portfolio for each
revaluation period, the Partnership Agreement distinguished
between that portion of any change in value attributable to
changes in the general level of interest rates (the Yield
Component) and that portion of any change in value attributable
to changes in the market's perception of risks specifically
associated with Colgate's credit quality (the Quality Component).
Together, the Yield Component and Quality Component would capture
all of the fluctuation in market value of the Colgate debt held
by the partnership.
The Yield Component was initially allocated among the
partners based on their respective capital interests.7
Southampton could elect, however, to change its and Kannex's
relative shares of the Yield Component to any level it desired
within a specified range, on 5 days notice. It could increase
its own share to as much as 49.7 percent, thereby reducing
Kannex's share to 51 percent, and it could reduce its own share
to as little as 10 percent, causing Kannex to take 89.7 percent.
The allocation of the Quality Component depended on whether
Colgate's credit had improved or deteriorated during the relevant
revaluation period. Improvement or deterioration was measured by
7 Kannex's share was set slightly higher (83 percent) and
Southampton's slightly lower (16.7 percent) than their respective
capital interests.
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