OVERSEAS LOANS

Evening Post, Volume CXV, Issue 64, 17 March 1933, Page 13

OVERSEAS LOANS

CHANCES OE ; CONVEESION

AN AUCKLAND OPINION

In- vi&w of the. expressed intention of-the Government to. negotiate 'with | the::-overseas holders of New Zealand 1 Government for a reduction of interest, it is of purpose to. speculate on the prospects of similar relief being afforded the local bodies (states the "New Zealand Herald";. Only recently the Municipal. Conforonee offered to eo-. operate with, the Government in furthering this object. The greater volume of local bo'ay indebtedness is domiciled in New Zealand, so that corresponding relief is .already within grasp ag a result _of the statutory 20 per cent, reduction of interest, and the loan conversion legislation. 'Indeed, only .40' per cent, of local body borrowing, is represented by overseas holdings, the • United. Kingdom's share being 27 per cent, and ""Australia's 13 per cent. . An Auckland authority in. close touch with the overseas, money market stated that; while ■satisfactory, arrangements might be made with the English holders of New Zealand local boay debentures for a reduction interest in connection with particular loans, the prospects of • a fairly general lowering of interest rates;on current overseas loans was unlikely.; ■■;.-...:■.' .:.•■. .... OVEESEAS VIEWPOINT. ' "The-; interest paid on New Zealand loeaKbody loans is not high, compared with similar forms of investment in tho British dominions and Crown colonies," tie. said: "If those- rates of interest aTe- still the market price -for. such _ investments I do not sec how English:' and; Australian: -holders aregoing to be persuaded to grant any particular preference to ' New Zealand. They can be threatened with default, but that is very unlikely on a present survey of the financial position, or moral suasion can be used in an endeavour to induce them to accept tho same rate of interest as is paid to local holders. "But is the overseas holder going to believe that New Zealand investors voluntarily converted their holdings as a great patriotic gesture, deserving oi' emulation? On the contrarj', they know that, ' unlike the British conversion scheme, under which dissenters were fully paid out in cash, the New Zealand Government is inflicting a penalty of 13 1-3 per cent, on all who refuse to convert. In short, there can be no effective appeal to Britain on the grounds of sentiment." MATURING CITY LOANS. : The most-promising avenue for interest reduction might appear at 'first sight to be represented by loans nearing maturity. In the ease of many local body loans, however, repayment will be largely effected by accumulated sinking funds, so that the question of interest will not eomo into the pToblein. Auckland City Council provides an interesting case in point. .Overseas loans totalling £450,000 will mature in- the next five years,, but £30,000 of that indebtedness is fully provided for by Vsinking funds. ' - These loans; with the exception of.the waterworks extension loan of £ 150,000, have been in existence for so many years that the sinking funds at their back .will fully repay them at maturity. . LABGE SINKING FUNDS. The additional loans, .1883, provide an instance..; They "have been carrying a sinking fund of i per cent, for nearly 50 years, and on March 31£1932, the. accumulated fund amounted to )'■'£, 201,167, more than sufficient to repay- the £200,000 of . principal. 'The streets^ improvement loan -of & 100,000 has carried a 1J per cent. sJTikingr.,f»nd T and>^thjr^as..alr,etuly r - iri hand, more than; sufficient money to , repay it. • The only loan, therefore,'for f whichjmoney will havo to b& raised for redemption is the ' £150,000 waterworks extension and improvement loan. ..The Auckland and Suburban Drainage Board has two overseas loans maturing itt.the.next five years. A loan of £.100,000, v floated in London and bearing interest; at-4* per cent., will mature on March 15 next year, while a loan, .of .„£■ 50,0.00,.domiciled, in. Australia, and also bearing interest .at 4i per cent., will mature on July 1 of next year. The sinking fund in both, cases is. J per cent., and as the currency of the loans was only 21 years, the accumulated fund for-redemption purposes is-comparatively small. Neither the Auckland Electric Power Board nor the Auckland Transport Board has overseas- loans maturing in the next five years. PROHIBITIVE EXCHANGE. In the event of loans for renewal being raised in New Zealand to meet the outstanding liability on overseas loans on their maturity the exchange penalty of 25 per cent, will constitute a burden from which the majority of local bodies will undoubtedly shrink. Tho alternative course of raising redemption loans in England or Australia, as the case may be, is certain, therefore, to be favoured. Whether renewal loans can be raised overseas at a reduced rate of interest is by no means tho certain proposition that some people suppose, accbi'ding to one Auckland authority. "The- English lender is not so keen about overseas investments as he used 'to1 be," he said, "and although the conversion loan in Britain was an outstanding success, it is by no means a certainty that a similar low rate of interest will prove acceptable where Dominion local body investments. are concerned. It all depends on the market price for such loans- at the time the renewal is wanted." RECENT ENGLISH ISSUES. The attitude of, British investors towards loans offered by local government authorities is illustrated by the reception of recent prospectuses. The latest of which details are available were two issues each of £1,000,000 of 3} per cent, stock, with currencies of 20 to 30 years, by the Barnsley Corporation and the Essex County Council. The Barnsley stock was offered at 98, giving an effective yield of about £3 13s per cent, on the shorter term, and the Essex stock at 98i. The underwriters of the Barnsley loan had to take up 78 per cent, of the stock, and those-, of the Essex loan were left with 88 per cent. Commenting on these results, the Times stated that the prices asked were approximately as high as those ruling for Government loans, this being due , to competition among issuing houses to secure business. In order to remove the risk of the market being upset by a series of ill-digested loan's the authorities decided to defer for tho present any further issues of the trustee class so as to give time for the present loans to be absorbed by the investing public. A fortnight later the Essex loan was quoted at the price- of issue and the Barnsley loan at 1-8 discount.