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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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