- 118 - is a $13.69 million loss. But the partnership also holds LIBOR Notes, which decrease in value when interest rates fall. The effect of holding a 15-percent share of the LIBOR Notes through the partnership is to magnify the net effect of a fall in interest rates: If the partnership did not hold LIBOR Notes the market value of Colgate's net worth would decline by $13.69 million; the LIBOR Notes increase this loss to $15.34 million. Now consider the effects of an increase in interest rates on Colgate's net worth. The Colgate bonds decrease in value by $12.94 million. The benefit to Colgate of having lower financing costs than the prevailing market rates is partially offset by Colgate's 15-percent share of the capital loss experienced by the partnership. But the net effect for Colgate is a gain. Colgate also benefits from the appreciation of the LIBOR Notes: If the partnership did not hold LIBOR Notes, the market value of Colgate's net worth would increase by $11 million; the LIBOR Notes increase Colgate's gain to $12.48 million. Thus, once again, the effect of the LIBOR Notes is to magnify Colgate's exposure to interest rates. From the perspective of Colgate's overall financial position, the LIBOR Notes do not function as a hedge at all. There is a curious inconsistency in Pohlschroeder's memorandum between his discussion of how the partnership will serve Colgate's liability management objectives and hisPage: Previous 108 109 110 111 112 113 114 115 116 117 118 119 120 121 122 123 124 125 126 127 Next
Last modified: May 25, 2011