ACM Partnership, Southampton-Hamilton Company, Tax Matters Partner - Page 21

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          Reserve to ease monetary policy, causing interest rates to fall             
          in late 1989 or the first half of 1990.  In a falling interest              
          rate environment, Colgate would earn a lower return on its cash             
          balances and short-term investments; yet, unlike its competitors            
          with relatively greater amounts of short-term debt, it would be             
          unable to cut its interest expense by refinancing.  The                     
          establishment of the ESOP had the further consequence of                    
          prompting Moody's to downgrade Colgate's long-term debt from                
          A1 to A2 on the ground that the addition of so much long-term               
          debt reduced the company's financial flexibility.  In the summer            
          of 1989, Colgate's treasury department was exploring ways to                
          rebalance the term structure of its debt and lower its exposure             
          to falling interest rates.  Pohlschroeder raised these issues in            
          his discussions with Merrill's representatives in July 1989.                
               The discussions also concerned the credit spread at which              
          Colgate's long-term debt was trading.  The market's perception of           
          the credit worthiness of a corporation is reflected in the extent           
          to which the yield on the corporation's bonds exceeds the yield             
          on U.S. Treasury instruments of comparable maturity.  The "spread           
          to Treasury" of Colgate's long-term debt had exceeded the average           
          for high and medium grade industrials throughout 1988 and, after            
          narrowing in the early part of 1989, had widened markedly during            
          the summer.  One reason for this change was the downgrade in                
          Colgate's credit rating in June.  Colgate's treasury believed               
          that another factor was widespread speculation that Colgate could           




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