- 120 -
To demonstrate how this arrangement would benefit the company, he
examines how a 200 basis point decline in interest rates would
affect the principals under different sharing ratios. He
concludes:
The more treasury risk is assumed by Colgate,
i.e. 85/15 to 51/49, the better off Colgate
is. The value of Colgate's share in the
partnership is roughly $30 MM using the 85/15
example and increases to $36 MM if we were to
assume 49% of the treasury risk and interest
rates dropped by 200 b.p.
At some point in the future, Colgate might wish to reduce its
exposure: "As an example, if we started with a 50/50 sharing
ratio and see interest rates bottom out, in the future we could
switch at the bottom of the interest rate cycle to a 100%/0%
ratio."
The difficulty of reconciling the LIBOR Note hedge with
Colgate's liability management strategy becomes more apparent in
the light of events that unfolded over the next 11 months. In
his memorandum, Pohlschroeder assumed that the partnership would
"establish a hedged capital structure with approximately $140 MM
of Colgate debt and $60 MM of LIBOR Note hedge." The ratio of
$140 million Colgate debt to $60 million LIBOR Notes originated
in Merrill's first effort to integrate the CINS transaction into
a liability management framework, the Partnership Transaction
Summary dated July 28, 1989. Thereafter, all of Merrill's
revisions of this document, its cash-flow projections and flip
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