- 33 -
available in the market at that time. ABN was loath to accept
any spread risk for Kannex. On the advice of its tax lawyers,
Colgate insisted, and the parties finally agreed, on a sharing
formula that limited Kannex's exposure to 7-1/2 basis points
(15 percent of a 50 basis point range).
The parties agreed on one further special allocation under
the Partnership Agreement. From the date of the initial capital
contributions through February 28, 1992, the first $1,241,000 of
partnership income and gain for each fiscal year otherwise
allocable to Southampton would be allocated to Kannex. This
preferred return was not cumulative and was prorated daily. For
this purpose, gains otherwise allocable to Southampton did not
include unrealized gains resulting from revaluations of
partnership assets. ABN had insisted on a preferred return as
compensation to Kannex for participating in the spread risk of
the Colgate debt. ABN intended that the amount would also
include a small service fee for the adjustments that the bank
would have to make to accommodate Southampton's discretionary
management of interest rate exposure under the Yield Component
provision. As the price for these benefits and as a substitute
for the covenants and other legal protections that a lender in
the position of Kannex would require as a condition for investing
a great deal of money in Colgate debt obligations, Colgate
considered the $1.24 million preferred return to be reasonable.
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