Interest rates key to liability on tender

Press, 18 January 1986, Page 8

Interest rates key to liability on tender

By

SIMON LOUISSON

in Wellington

Taxpayers may foot a bill of about $lO million for the default by Rakiura Holdings on its |lOO million Government stock tender. This is because the value of Government stock moves up and down according to a formula, based on the term of the stock and the difference between the rate it was purchased at and present rates. Rates have moved more than 2 per cent since Rakiura’s $lOO million bid at 16.69 per cent so the stock is worth less than $9O million on today’s market. When the Government has to reissue the tender it will cost that much more if interest rates remain at present levels. The Associate Minister of Finance, Mr Richard Prebble, discounted suggestions that the Reserve Bank had lost $lOO million. “All that has happened is that a company which made a bid for Government stock cannot settle,” he said. He said it would depend

on how interest rates moved during the next two or three months whether the Government made a profit or showed a loss from the failure to settle. If the interest rate which the Government had to offer to sell the stock at was higher than that offered by Rakiura Holdings, then the Government would show a loss. Mr Prebble said the Reserve Bank had sold $7 billion of Government stock in 25 tenders and this was the first default.

The bank’s chief manager of financial markets, Mr Kerry Morrell, said it would be impractical for dealers to have to put up 5 per cent of their tender when bids were made. Total bids for most tenders tended to be three or four times the amount offered and if the 5 per cent had to be submitted, borrowing costs would rise.

He said Rakiura had been a “reasonable player” for six to eight years. He had to rely on its record. “You don’t need to apply for a driving licence every time you get in a car,” he

He agreed that the loss to the taxpayer could be estimated at $lO million, although the cost would be incurred only when the money was borrowed.

The Government’s view is that in a more liberal market there must be some failures.

Mr Morrell said the default should not push interest rates up. The market would regard it as an isolated incident.

Money market dealers were critical that the Reserve Bank did not more carefully assess the list of dealers exempt from the deposit requirements. Rakiura Holdings is essentially a one-man business run Mr Brian Alexander, the former Wellington manager of Securitibank. It has a paid-up capital of only $lOOO. A spokesman for the Justice Department said it was unlikely that there was any breach of the ComEianies Act and that any egal dispute would be between the Reserve Bank and Rakiura.

Dealers said the bank must have known that Rakiura had big problems when rates started to rise early in the month. They were critical of the bank’s failure to act sooner. One dealer said the bank checked with Rakiura at the time of the tender and was assured that Rakiura was backed by a big organisation able to cover any movement in interest rates. Another dealer said he had been asked to join a syndicated bid but had declined because of concern about covering any losses.

Dealers were worried that the default would scare off overseas investors because it reduced the reputation of the New Zealand market.

Yesterday, interest rates eased slightly from 19.5 per cent to 19.1 per cent on fiveyear stock. This was because there was $lOO million more in the system than there would have been if the tender had been settled and because of early social welfare payments. The call rate fell from 20 per cent to 17.5 per cent.