ACM Partnership, Southampton-Hamilton Company, Tax Matters Partner - Page 37

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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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