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transactions on behalf of both counter parties. With respect to
each issue of fixed-rate Colgate debt acquired by the
partnership, Kannex entered into a fixed-for-floating interest
rate swap on a notional principal amount corresponding to the
dollar amount of Kannex's exposure to interest rate risk on the
debt. Whenever Southampton elected to adjust the Yield Component
sharing ratio or Kannex's partnership interest changed, the
notional principal amounts of Kannex's swaps were adjusted to
cover the amount of its exposure. The net effect for Kannex
resembled an investment in a portfolio of LIBOR-based assets
whose value would not vary in relation to the value of its
LIBOR-based liability under the Revolving Credit Agreement.
The swaps with ABN Cayman Islands effectively offset
Kannex's losses and gains from the intrinsic treasury risk of the
Colgate debt held by the partnership. The swaps also offered
Kannex the opportunity to profit from the spread risk of the
Colgate debt. Kannex was required to pay interbank swap rates on
its swaps. The fixed interbank swap rates were determined by
adding a spread to the prevailing yields on comparable Treasury
securities. For every piece of Colgate debt purchased, there was
a referenced Treasury rate. To the extent that the yields on the
partnership's Colgate debt exceeded these rates, Kannex kept the
difference. ABN profited from the spreads that it earned in
hedging its swap positions through coordinated trading of
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