THE MONEY MARKET.

Auckland Star, Volume LIX, Issue 305, 26 December 1928, Page 4

THE MONEY MARKET.

CITY LOANS

COMPULSORY SINKING FUNDS.

The ruling of the Local Government Loans Board in regard to sinking fund provision and flotation costs, both in regard to new and repayment loans, is bound to have a serious -effect upon council finance, not only in Wellington, but in all centres, states the Wellington "Post."

The Wellington City Council has a number of loans which in the past have had no sinking fund to redeem them in part or in whole, but the Loans Board has now ruled that in future sinking funds must be provided, the percentage varying, acording to the estimated life of the work on which the money is spent, from 1 per cent up to 3 per cent, which will entail a considerably increased annual payment, in a number of cases, from the general fund.

Furthermore, the Loans Board has decided that the costs incurred in raising loans must be a charge against annual expenditure, and not against the loan, as has been the practice for many years past. In some cases this will make for a heavy additional charge on the resources of the council, and in years when substantial loan commitments are entered upon may be so heavy as to dislocate the finance of the council, and could only be met by an increase in the rates. Expenses in the case of renewal loans will not be so heavy, but will still be fairly considerable.

Taking flotation costs, advertising, brokerage, commission, etc., as working out at % per cent, the charge in respect of a £100,000 loan would be £2500, and in years when loans mount up to £400,000 or half a million the charge becomes a serious matter.

Unless some consideration is given to the representations to be made to the Government, the position will be difficult. The matter was referred to the executive of the Municipal Association by the Mayor, Mr. G. A. Troup, at the last meeting, and the members were unanimous that the Government should be approached. The question will be further discussed at the annual conference of the association at Wanganui.

CHRISTCHURCH CITY RATES.

DEBENTURES AT 5%

That the Finance Committee of the City Council was justified in deciding to sell debentures for its roading loan of £220,000 at per cent, which had been paid for previous loans, has been shown by the results (says the Lyttelton "Times"). The first instalment of the loan, amounting to £56,800, has been authorised to be raised as from January 5 next, and already debentures amounting to £37,100 have been sold, and several inquiries from other investors have been received. The city treasurer (Mr. J. Anderson), on whose suggestion the committee decided to offer the lower rate of interest, stated yesterday that he expected to sell the balance of the debentures without any difficulty. The debentures which are now being offered for sale are for the following periods:—

£10,800 for a term of seven years. £38,000 for a period of fifteen years. £8000 lor a period of thirty-six and a-half years.

The whole of the debentures for a term of seven years have been sold, and £26,100 worth of those for a term of fifteen years have been taken. Those for the thirty-six and a-half years period have not proved so popular, only £200' worth having been disposed of.

The City Council was the first public body in Canterbury to offer 5V< per cent interest on its loans, and investors at first were inclined to hold off in the hope that the council would be compelled to pay the higher %ate of 5% per cent. However, other local bodies quickly followed the example set by the City Council, with the result that 5% per cent is now regarded as the standard rate of interest for local body debentures.

Shortly after the war when investments were numerous and m'oney was comparatively scarce the rate of interest on local body debentures rose as high as per cent. The City Council sold £98,000 worth of Electricity Department debentures at that rate, but these will be paid off in full on September 1, 1929. During the past few years the interest rate has been steadily declining, and it is thought that within a year it may be as low as 5 per cent. It is hardly likely, however, that it will go any lower than that, one of the factors against a low rate of interest being the increase in the Government debenture tax from 3/ to 4/6 in the pound.

An interesting feature of the City Council's latest issue of debentures is that the bulk of them have been sold to Timaru and Dunedin investors. Apparently the Christchurch investors have been reluctant to accept the lower rate.