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a credit improvement, however, was negligible. BFCE's rating was
AAA and could not have improved. BOT was rated AA. If an
improvement in BOT's credit could have increased the sale price
of the notes, then one would expect that the difference between
the banks' respective ratings would have affected the pricing of
the notes at issuance. It had no effect.
The second and more important factor was interest rates.
Based on its assumption that future interest rates would equal
the levels predicted by the yield curve used to price the LIBOR
Notes at their issuance, Merrill estimated that the issue price
for the notes exceeded by approximately $1.3 million the bid
price at which the notes could be sold to a third party. Hence,
the partnership, and ultimately Colgate, would almost certainly
lose money.
One must wonder what were the nontax benefits that the
partnership hoped to achieve through its acquisition of the notes
at that price level. Interest rates would have had to rise by at
least 400-500 basis points, to a level of 13 percent or more,
soon after the partnership acquired the LIBOR Notes and be
expected to remain at that level throughout the 5-year life of
the notes in order for Colgate to earn a sufficient return from
the notes to cover the transaction costs of the section 453
investment strategy. Had the partners' economic arrangement
contemplated a pro rata allocation of these costs, Colgate still
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