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2. Development of Colgate's Liability Management Partnership
The notion that Colgate could use a partnership to acquire
its own debt was the breakthrough that overcame Colgate's
reservations, for it provided the opportunity to design an
elaborate superstructure of liability management functions around
Merrill's original tax shelter transaction. To understand the
extent to which ACM was designed to serve these functions, we
first review the concerns of Colgate's treasury department in
this period.
A number of developments during 1988 and 1989 posed special
challenges for the management of Colgate's debt. In this period,
Colgate radically altered the maturity profile of its debt
through two actions. First, it used the proceeds from the sale
of Kendall in October 1988 to retire over half a billion dollars
of commercial paper constituting all of its U.S. short-term debt.
Second, it established an employee stock ownership plan (ESOP) in
June 1989, financed by issuing $410 million in long-term debt.
The substitution of long-term debt for short-term debt
caused Colgate's average debt maturity to exceed substantially
the norm in its industry and increased its exposure to interest
rate risk.3 Colgate's treasury department expected the Federal
3 All other things being equal, the longer the maturity of a
debt instrument the more sensitive its value will be to
fluctuations in market interest rates. Hence, long-term debt
tends to carry greater risk than short-term debt of the same
issuer.
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