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By separate swap confirmations effective November 27, 1989,
Merrill Capital agreed to pay ABN, and ABN agreed to pay Kannex,
interest at the rate of LIBOR minus 25 basis points on a notional
principal of $903,765, an amount that corresponded to Kannex's
share of the 5/8 discount incurred by the partnership in the sale
of the Citicorp Notes and origination of the LIBOR Notes.
Following the distribution of the BFCE Notes to Southampton, the
notional principal was reduced to $680,156. This revised amount
represents the product of Kannex's then current percentage
interest as reflected on a preliminary draft revaluation
worksheet (87.06 percent) multiplied by the portion of the
discount attributable to the BOT Notes retained by the
partnership ($781,250). The documentation characterized these
agreements as "swaps". This is a misnomer, however, because the
payment obligations were unilateral. The parties'
characterization reflects the fact that these "one-sided swaps"
were negotiated in conjunction with the back-to-back hedge swaps
and were intended to complement them. Like the hedge swaps, the
one-sided swaps had the effect of compensating Kannex for a loss
that it would otherwise have borne in connection with the
contingent payment sale.
We have previously discussed how the partnership chose to
account for the 5/8 discount incurred in the contingent payment
sale for financial and tax accounting purposes. Rather than
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