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foreseeable future would have been less than 1/10 the expected
cost (.5 x $478,000 � $2.5 million).25
In December 1991, after the redemption of Kannex's interest,
the partnership concluded that it no longer needed the BOT Notes.
The explanation recited in the minutes of the twelfth partnership
meeting is that since Colgate and Southampton now owned over
99 percent of the partnership, "the principal Partners' net
economic exposure to the risk of interest rate fluctuations in
the value of the Colgate debt was effectively minimal," and with
their usefulness exhausted, so volatile an investment could not
be justified. Heidtke's explanation at trial was as follows:
"[A]t that point in time, the need for the - originally for the
LIBOR notes as a hedge of the debt had basically gone away
because now we owned all of the debt basically, so it was no
longer outstanding, it was effectively retired".
It was reasonable for Colgate to be indifferent about
exposure to the volatility of its own debt in the partnership
portfolio at this time. Yet, it had always been the case that to
the extent Colgate held its own debt through the partnership that
debt was economically retired and there was no exposure to hedge.
This was among the principal advantages of the liability
25 The hedging benefit is maximal if it is realized
immediately. The longer it takes for interest rates to rise, the
lower the present value of this benefit.
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