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In exchange for the 2 Chase PPNs sold to Norinchukin, Saba
received $80 million in cash and 2 installment purchase
agreements dated March 23, 1990 (Norinchukin LIBOR notes), each
with a stated NPA of $25,765,000 for a total NPA of $51,530,000.
At the time of these transactions, Fuji was rated Aa1 by
Moody's and AA by Standard & Poor's, while Norinchukin was rated
Aaa by Moody's and AAA by Standard & Poor's.
The sale of the Chase PPNs to Fuji and Norinchukin included
$94,384 of interest that had accrued on the PPNs for the period
from March 21, 1990 through March 23, 1990. Saba reported this
amount as interest income on its Form 1065 for the taxable year
ended March 31, 1990.
The Fuji and Norinchukin LIBOR notes were effective as of
April 2, 1990, and provided for a stream of 20 quarterly
payments, beginning on July 2, 1990, and ending on April 2, 1995,
in an amount that would float based on 3-month LIBOR determined
at the beginning of the payment period multiplied by (1) the NPA
of the note, and (2) a fraction consisting of the number of days
between payment dates divided by 360.
Saba sold the Chase PPNs at 99.25 percent of par, or at a
private placement discount of $1,500,000 (75 basis points times
$200,000,000). Paul A. Pepe (Pepe), vice president for Merrill
Lynch Capital Markets, determined the origination value for the
Fuji and Norinchukin LIBOR notes based upon the sum of the par
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