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acquire XYZ long-term debt over a period of 6 months,
and LIBOR-based notes. "The purpose of the LIBOR notes
will be to partly hedge the interest rate sensitivity
of the long-term XYZ debt acquired by the Partnership."
Depending on the maturity of the XYZ debt acquired,
Merrill anticipated a ratio of 70-percent cash ($140
million) to 30-percent LIBOR Notes ($60 million).
Step 4: Some long-term XYZ debt is exchanged for newly
issued medium-term XYZ debt.
Step 5: If a substantial amount of long-term debt was
exchanged, the partnership would likely reduce its
holding of the LIBOR Notes in order to rebalance its
hedge. "Such a reduction would be necessary because
the Medium-Term Debt, received in exchange for
long-term XYZ debt, is less interest rate sensitive
than the long-term XYZ debt. LIBOR Notes may either be
sold directly or distributed to one or more Partners in
a non-liquidating distribution."
Steps 6 and 7: Partnership assets are disposed of in
the event that the desired investments cannot be made.
Step 8: A Corp.'s partnership interest is "possibly"
redeemed at any time after 1 year following formation.
Step 9: The partnership is consolidated with XYZ for
financial accounting purposes. The document advises
that
[i]t would be most reasonable for the
Partnership to sell the LIBOR Notes and any
other LIBOR-based assets if A Corp. is
redeemed. Since the principal asset of the
Partnership, other than LIBOR Notes and
LIBOR-based assets, is likely to be XYZ debt
and XYZ would be a 98% partner, the hedge
protection provided by the LIBOR Notes and
LIBOR-based assets is no longer necessary.
Step 10: B Corp. is eventually retired after a period
of years.
In support of its characterization of the LIBOR Notes as a
risk management tool, Merrill performed a series of quantitative
analyses of the effect of a given change in the level of interest
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