N.Z. CORPORATION

Evening Post, Volume CXIX, Issue 109, 10 May 1935, Page 7

N.Z. CORPORATION

PROSPECTUS .ISSUED

MINISTER'S STATEMENT

The prospectus of the Mortgage Corporation of New Zealand/inviting public subscription of £500,000 of the share capital of the Corporation, has been released for publication by the Acting Minister of Finance (the Hon. A. Hamilton). Accompanying the prospectus is a statement.by the Minister, who reviews the legislation setting up the Corporation, and in detail refers to its part in placing mortgage finance in New, Zealand, on a sounder basis. The capital of the Mortgage Corporation is to be £1,000,000 in shares of £1 each, 500,000 of which are to be allotted to the Minister of Finance and held by him on behalf of the Crown. "From this it will be noted that the Crown actually provides half of the total share capital, but the Minister does not have any voting rights as a shareholder of the Corporation," said the Minister. "The remaining 500,000 shares are now offered at par for public subscription, and as the shares will carry a cumulative dividend of 4J per cent, payable out of *2f . Profits of the Corporation the Minister confidently expects that the shares will be readily taken up The shares will be allotted by the Minister of Finance in terms of the legislation, and not more than 5000 shares will be allotted to any one person. The • liability of every shareholder will be ', limited to the amount for the time ' being unpaid on the shares. A STRONG LEAD. "Having regard to the national character of the institution, the Mortgage Corporation should give a strong lead |. in the direction of placing mortgage , finance in New Zealand on a sounder basis. The establishment in the DoI minion of a system of mortgage finance that has proved satisfactory in other countries should provide improved I finance for farms, business premises I and houses, to the benefit of the community generally. The essence of this system is linking long-term mortgages lor borrowers to bonds marketable on the Stock Exchange for lenders. The long-term instalment mortgage is undoubtedly the ideal form of finance for larmers and those buying a home for themselves. The mortgagor will not only have finality in his financial ar- • rangements, thus obviating the difficulties and recurring expense of refinancing, but will also iave that sense ,of security and independence which ; must result from the knowledge that his loan liability is being reduced by ; every instalment paid. On the other ! hand, holding bonds with a floating charge over a large number of mortgages instead of an individual mortgage will give lenders less difficulty in collecting interest, also so much greater security and a liquid investment that can be realised readily on the Ctock Exchange, in whole or in part as desired, without any delay, v, "Some people appear to be a little uneasy at the magnitude of the Corporation that is being established, but actually this magnitude will be a source of strength and stability. Experience in other countries with somewhat similar institutions has definitely shown this to be the case. In fact the class of business which the Corporation Is to handle may be likened to that of insurance in being particularly suitable-for • large-scale operations, firstly, the large organisation permits of a wide diversification of risks and in this regard it may be pointed out that investments throughout the whole Dominion secured on' lands used for a wide range of purposes, both rural and , urban, obviously provide a broad basis i for stability. i ~ Further the large volume of mort- ; Bage investments will permit of a wellorganised supervision of the numerous ' properties at a very low rate per cent. ipf the capital invested. On the financial side also the large institution has . every advantage in that its bond'issues When available to the investing public ( will be large enough to establish and .maintain a definite market on the Stock Exchange, while the mortgage capital repayments to the Corporation will flow in sufficient volume to facilitate reinvestment- or redemption of bonds from time to time. ~ SALE OF STOCK AND BONDS. "Apart from the share capital, which is to be paid up within twelve months, the Corporation will obtain funds for its business from the sale of stock and bonds having a currency not exceeding fifty years corresponding to the maximum period for which loans on mortgage may be granted. In the interests of financial stability, however, /the issue of stock and bonds is restricted by the Act to not more than fifteen times the capital and the •amount then standing to the credit of the General Reserve Fund. As this tprovision applies to the bonds to be •issued to the State in payment for the State mortgages transferred to the Corporation, notwithstanding the fact •that the Corporation is protected from Joss in respect to these mortgages, it will be appreciated that there must always be a very substantial reserve "between any loss in respect of new 'business done by the Corporation and -the share capital. In effect this means . that whereas the minimum reserve required by the Act must be maintained ,Bgainst the whole of the investments of the Corporation, actually only losses In respect of the new business will fall ;upon that reserve. ■~ "Under the legislation, an initial Reserve Fund of not less than £2,750,000 -is to be provided by the State in the form of local body securities to be handed over to the Corporation.' If, ■and when, the Reserve Fund amounts to more than 10 per cent, of the bonds or other securities issued by the Corporation, the excess accretions to the Reserve Fund above 10 per cent, go to the State until such time as the £2,750,000 has been repaid, and in the meantime so much of the interest of the Reserve Fund investments as is earned by these securities will also ■go to the State. Apart from this the Corporation will have no liability to the State in respect to this initial contribution to the Reserve Fund., That is to say, if the Reserve Fund never reaches 10 per cent., the Corporation will never have to repay this amount. ■ "It is, however, anticipated that the Reserve Fund will increase steadily from the compounding of interest and also from the 2 per cent, contributions which all borrowers from the Corporation are required to make to the Reserve Fund. GILT-EDGED SECTJRITIES. "From the point of view of the security of the share capital, it may be pointed out that the Mortgage Corporation has been expressly designed to make the bonds of the Corporation gilt-edged securities for the very good reason that it is realised that it is only by achieving this standard that capital for mortgage investments can be obtained on the best terms possible. To this end the Corporation is restricted by the Act to lending on first mortgage of land up to the recognised trustee' margin of two-thirds of the value of the security only, and in the case of rural lands valuations are to be based primarily on the earning capacity of the lands. Furthermore, it should not be overlooked that by lending on long-term table mortgage the margin of security for such investments will steadily increase as repayments are made. ■ "To enable the Corporation to assis

in the rehabilitation of farmer mortgagors provision, has been made in the Act allowing the:' Corporation to advance up to four-fifths of the value of the security for the purpose of repaying any existing mortgage, but it should be emphasised, that the Minister of Finance is required to guarantee the -Corporation against any loss that may be incurred by it in respect to any ex- . cess of an advance over the trustee margin of two-thirds. "The bonds will be authorised trustee investments, and will fully merit that status. This being so, it follows that the shares of the Corporation must likewise be gilt-edged, for if everything possible is done to make the whole organisation safe and sound, in order to obtain finance at the lowest possible rate, it follows that the possibility of loss falling upon the share capital is very remote indeed. "As it is a national institution, the dividend that may be paid on share capital is properly limited, but the full return of 4i per cent, per annum on the paid-up capital is assured from the commencement. As a matter of fact, the share capital itself will largely earn the dividend payable thereon through direct investment of the amount, but it is otherwise safeguarded by the profits earned on other investments. In this connection, it may be mentioned that a margin of up to 1 per cent, between the borrowing and the leriHing rates of the Corporation is allowed for administration costs, and these costs do .not include the building-up of reserves against possible losses, for which adequate provision is made separately. SECURITY OF DIVIDEND. "On the mortgages' to be transferred to the Corporation, 1 per cent, margin would provide £500,000 per annum, and in addition there will, of course, be the margin on the new business done by the Corporation. Out of the large amount that will thus be available annually, there must, of course, be provided the running expenses of the Corporation, but it may be mentioned that the dividend on share capital, which in total will amount to £45,000 per annum, will rank ahead of the return to the State on the contingent liability representing a portion of the mortgages to be transferred to the Corporation. That is to say, in respect of the contingent liability the annual interest return to • be received by the State is the net i profits after paying running expenses ■ and the full dividend on shares. The i security of the dividend on shares will 1 thus be clearly apparent. 1 "In a nutshell the public of New 1 Zealand are invited to subscribe ■ £500,000 of capital for a national in- ; stitution that cannot fail to be of great benefit to the Whole community. It is 1 purely a financial organisation designed • to be as safe and as sound as it is possible to make it in order that finance may be obtained through the sale of i bonds at the lowest possible rate. ; Lending is restricted to a safe mar- ■ gin on first mortgage only, and substantial reserves are provided from the outset The success of the whole institution depends upon obtaining the confidence of investors in the bonds to be issued by the Corporation, but all the steps taken and all the safeguards imposed to this end will react to the benefit of shareholders who are assured of absolute security for their capital and assured of a dividend at the rate of 4J per cent, prescribed by the Act. It may be added that this rate compares very favourably with the return now obtainable on any other investment of a gilt-edged nature. "In these circumstances I have every confidence in recommending the people of New Zealand to subscribe the capital of the Mortgage Corporation of New Zealand. Finally, I may mention that v "desired that the shareholding should be as widespread throughout the community as is possible, and in the allotment of shares due consideration will be given to the small investor applying lor the minimum of five shares I and upwards."