LOAN FAILURES.

Auckland Star, Volume LXVI, Issue 35, 11 February 1935, Page 4

LOAN FAILURES.

INSTANCES IN LONDON.

AUSTRALIAN AFFECTED

I OPERATIONS OF "STAGS." 1 (From Our Own Correspondent.) I SYDNEY, February 4. The people who are particularly anxious to find fault with the present Federal Government have discovered a plausible excuse for criticism in the comparative failure of Australia's latest conversion loan. This was the largest operation of the kind yet attempted by Mr. Bruce in London. The amount was £22,384,000, issued at par, bearing interest at 3 J /i per cent and maturing in 20 years, with right of repayment after 21 years. The terms are the best yet obtained in the I present series, and this, the ninth loan since 1932, brings up the total of conversions to £146,000,000. The amount thus saved for Australia in interest is nearly £3,000,000 a year. The outlook seemed favourable so far as market conditions were concerned, and the terms wore approved by the Loan Council after careful discussion with the underwriters through the High Commissioner. But unfortunately, after this decision was reached, there was a "slump" in the money market and in the end 39 per cent of this conversion loan was left on the underwriters' hands. Attempt to Outwit "Stags." The explanation offered by Mr. Bruce, through Mr. Lyons, is that this disappointing result is due chieily to the manipulation of the securities on 'Change. A large proportion of such issues is frequently taken up by the "stags," who apply for stock only with the intention of holding for a very short period, and selling as soon as the slightest rise will give them a profit. As' a rule withdrawal is optional for three weeks after application, and in this instance the "stags" are said to have made good use of their opportunity. Mr. Bruce tried to outwit the "stags" by reducing the period for withdrawal from three weeks to 10 days. But it could not be further reduced without inconveniencing original holders of the stock—especially trustees —who might require some little time to readjust their affairs in this respect. The result was that the "stags" had things their own way and a sudden fall in other securities induced many of them to "get out" early, and thus leave the underwriters to shoulder part of the burden. Other Failures. Of course the "Labour Daily" and other hostile critics wave this explanation contemptuously aside, and insist that the comparative failure of this loan shows clearly that Australia's credit abroad is declining again. But there is plenty ot evidence to show that, quite apart from Australian finance, the activity of the "stags" is a serious menace to other legitimate flotations on the London market just now. A week before this last conversion loan was launched the London County Council tried to raise £10,000,000, and the underwriters eventually had to provide 55 per cent of the issue—which means, considering all things, a far woifO failure than Mr. Brucc's. The 'V -> whose business it is to look out for ill profits and quick returns, regarded the Commonwealth loan as the better venture of the two, and when the terms were announced many of them withdrew their subscription from the London County Council issue and put the money into the Australian flotation. This meant the failure of the L.C.C. loan, and when the market subsequently "slumped," they treated the Australian loan in the same way. ~•-',:, Means of Prevention. That such operations arc injurious' to wholly legitimate financial transactions is evidenced by a question asked this week in the House of Commons. Sir Cyril Cobb has drawn the attention of the Chancellor of the Ex.lieo.uor to the nature of these "stag" speculations and their effects, and he has requested the Chancellor "to confer with the Stock Exchange committee and the loan-issuing houses with a view to making a distinction, bej tween genuine subscribers and 'stags, by means of preferential allotment to those who renounce the right to withdraw their application before allotment. It is probable that the proposed innovation would have the desired effect, but in any ease Sir C. Cobb's remarks strongly corroborate Mr. Brucc's explanation of the rather disappointing reception of our last conversion loan. It is also fair to assume, with Mr. Lyons, that the failure of the London County Council loan the previous week | had an adverse effect on the Australian flotation. But quite apart from this the money market is clearly passing through one of its periodic spasms of apprehension and anxiety just now. A few days ago a cable message informed us that a Blackburn Corporation loan of £1,000.000 was a complete failure. The security is undeniable, and the rate—2% per cent, issued at 98%—comparios quite favour.ibiv with other recent similar issues. Butonly £30000 was subscribed, and the balance—97 per cent of the issue—was ,cjt to the underwriters to take up. No doubt, as the "Daily Telewanh" explains, the recent failure of such flotations is duo chiefly to "financial indigestion" in the money market. But that is not Mr. Brucc's fault.