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At the end of August 1990, Colgate's treasury concluded that
a significant change had occurred in the interest rate
environment. Inflationary expectations and the prospect of war
in the Persian Gulf were causing a rise in long-term interest
rates and a steepening of the yield curve. Under these
conditions, the value of Colgate debt held by the partnership
would fall. Reversing its policy over the past 10 months of
accepting substantially greater interest rate exposure than its
pro rata share, Colgate caused Southampton to reduce its share of
the Yield Component to 10 percent, effective September 6.
Thereafter, Southampton adjusted the Yield Component Sharing
ratio on two more occasions, maintaining its exposure between
10 and 20 percent.
Contrary to the expectations of Colgate's management,
long-term interest rates declined. By the spring of 1991
Colgate's treasury department identified a constellation of
factors favoring consolidation of the partnership and retirement
of its Colgate debt holdings in the near future. Not only were
general interest rates lower, but the credit spreads on Colgate
debt had narrowed appreciably, reflecting stronger prices for the
company's stock and diminished takeover risk. Moreover, efforts
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