- 20 -
rates on the value of Colgate debt and LIBOR Notes in the
partnership portfolio. These analyses purport to demonstrate
that the interest rate sensitivity of the interest-only LIBOR
Notes greatly exceeds that of fixed rate debt instruments of
equal maturity and is comparable to that of long-term fixed rate
debt. Thus, a 100 to 200 basis point increase or decrease in
interest rates would produce roughly equal and offsetting changes
in the value of $1 of LIBOR Notes, $2.34 of 9 percent 5-year
Colgate debt, and $0.88 of 9-5/8 percent 30-year Colgate debt.
Pohlschroeder was impressed with Merrill's analysis. In an
October 3, 1989, memorandum written for the purpose of
recommending the "ABN Liability Management Partnership" to his
superior, Colgate treasurer Brian Heidtke (Heidtke),
Pohlschroeder explained how the composition of the partnership's
portfolio would be planned to serve the purpose of "risk
management within the partnership". "One aspect of importance is
the interest rate exposure on the asset of the partnership which
consists of Colgate debt. To minimize the exposure to ABN and
Colgate, it is planned to convert a portion of the short-term
notes to contingent LIBOR Notes as a hedge of the partnership's
fixed rate assets." Although the hedge ratio would be determined
through negotiations with ABN, he was confident that the
partnership could acquire $140 million of Colgate debt, and that
$60 million of LIBOR Notes would provide an appropriate level of
protection. The plan was to adjust "the LIBOR note hedge" as
Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 NextLast modified: May 25, 2011