- 10 - 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.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
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