- 71 -
effect within the partnership portfolio. It was clear to him
that effect would not be adequate, and hedging instruments of
greater precision and reliability were available. Accordingly,
ABN New York arranged to neutralize the effect of the LIBOR Notes
on Kannex's interest. The structure that it employed for this
purpose consisted of back-to-back swap transactions with Kannex
on the one hand and Merrill Capital on the other. ABN New York
assumed the role of intermediary on the assumption that neither
Merrill Capital nor any other third party would accept Kannex's
credit risk.
By swap confirmations effective November 27, 1989, the issue
date of the LIBOR Notes, ABN New York entered into a hedge swap
agreement with Merrill Capital. Under the swap, ABN New York was
required to make to Merrill Capital quarterly payments of 3-month
LIBOR over 5 years equivalent to Kannex's 82.63 percent pro rata
share of the payments owed to ACM under the LIBOR Notes. Merrill
Capital was required to pay to ABN New York the sum of
$28,433,655 in 20 equal quarterly installments together with
interest on the unpaid balance at a rate of LIBOR minus 25 basis
points. This amortizing principal amount was equal to 82.63
percent of $34,410,814, Kannex's pro rata share of the issue
price of the LIBOR Notes. ABN New York entered into a matching
hedge swap with Kannex under which Kannex's rights and
obligations vis-a-vis ABN New York corresponded to those of ABN
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