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Treasury securities or futures, or through matching swaps with
third parties.
In order for the hedging of Kannex's risks to be both
effective and lucrative, the selection of Treasury securities
used in the construction of hedge positions had to be consistent
with the selection of Treasury securities used in the revaluation
of the Colgate debt within the partnership. Aware of these
hedging operations, Merrill accommodated them by consulting with
ABN on the valuation of ACM's Colgate debt whenever changes in
value were likely to affect Kannex's capital accounts. Thus, one
Merrill internal memorandum described the procedures for an
upcoming revaluation:
Since Kannex must actually trade Treasuries
based upon the Base Treasury yields, Kannex
would determine yields on Base Treasuries for
each Note. These yields, along with
previously determined spreads, are used by ML
to set prices of each Note.
Under its Revolving Credit Agreement with Kannex, ABN
reserved the right to sell participations, provided that it would
remain solely responsible for performance of the obligations owed
to Kannex under the Agreement.18 Beginning in the fall of 1989,
ABN offered a number of banks the opportunity to participate in
18 Details of the syndication of the loan to Kannex and
details of Kannex's ultimate liquidation, which are related
hereafter, shed light on the character of the relationship
between Kannex and ABN.
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