STATUS OF BONDS

Evening Star, Issue 21945, 4 February 1935, Page 7

STATUS OF BONDS

PERILS OF CHATTEL LOANS After noting the assurance of the Minister that the Crown’s prerogative will be abrogated, and that it will merely rank as a Creditor with other creditors of the same class; and after insisting that the directorate should be elected by the bondholders, the statement proceeds to challenge Mr Coates’s assertion that the bonds will merit the status of trustee investments for the following reasons;— (a) Tho present Trustee Act empowers trustees to advance against freehold land up to two-thirds of the value of the land. In practice many trustees do not lend up to the full statutory authority. Even under this provision, trustees have not always succeeded in preserving trust capital. How can bonds representing advances up to 70 per cent, of the value of the mortgaged property be regarded as sound trustee securities? (b) According to the pamphlet the corporation has authority also to lend (and that ' without limit) against security over stock and chattels. Such loans, of course, never have been an authorised trustee investment. If it is seriously intended to use this power the value of the bonds will be correspondingly discounted by investors, and they should most certainly not be designated “ trustee ” security. Lending money on the security of stock and chattels is a highly specialised class of business and one of tho most difficult and complicated forms of mortgage lending, and it should be left to those who have the facilities for dealing with their borrowers and securities, and who have bought their experience in such dealings. The committee was informed that it was not intended to lend on stock and chattels except to the corporation’s own mortgagors whose lands were mortgaged to it. The committee wouW go further. It holds the opinion very strongly that this form of landing should not be within the province of the corporation, except that the corporation should have power to take stock and chattels securities from its own mortgagors who are in default.

(cl If bonds ar-e to qualify as a trustee investment, then: (a) There should be a fixed period for redemption. The pamphlet was silent on, this point, but the committee was informed that the bonds would not be perpetual, and that probably they would be issued with varying maturity dates, (bl The bonds should remain relativelv stable in value, and should he readily realisable in emergen rv. It seems likely that the bonds will fluctuate in value with varying interest rates, particularly after ennitnl in the country is freed, and confidence is restored.

In the opinion of the committee, these bonds will not find favour as trustee investments. Even if the suggestions of the committee, above, are'met, mortgages renresentino advances ud to the verv hioh figure of 7(1 per cent, or the value of the security, even with the additional protection afforded by the caoitri and reserves of the cornora* tion (eauivatent to a camnarativelv f>yoli percentage of the corporation’s '•abilities' "dll not h» roorrdsH by trustees as “ gilt-edged ” securities. PRODUCTION NATION DIFFICULT. The committee is gravely concerned at the difficulties—difficulties which it

regards as insuperable—of creating a competent staff to deal with valuations. Even under our present system, with its great advantages of reciprocal personal knowledge of and contact between borrower and lender, valuation is the most difficult problem. We have been struggling for years to try to find a really sound basis of valuation, but even on the small scale of private operations, there is always a difficulty about the basis of valuation. The committee doubts whether the corporation will be able to secure early a sufficient and efficient staff of valuers to deal with the volume of business that will fall on it from the start. Hopelessly interlocked i i the question of a basis for valuation is the question of personal efficiency of the individual mortgagor. The pamphlet proposes that valuations be based on actual production results. If everyone were equally competent then nothjng more would need to bo said. It is a commonplace that one farmer, owing to superior ability, can make a comfortable living on a farm Actual production is not the only test to bo applied. The valuer must take into account the personal ability of each mortgagor and the quality of the stock at his disposal. The committee doubts whether any system of valuation can be devised which will adequately discriminate between the competent and the incompetent farmer. The best judge of a farmer's competence is the existing mortgagee, or his representatives, who have an intimate experience of the farmer’s working of his property and of his general character and ability.

PERSONNEL DIFFICULTY. If this legislation is going to bo enacted the committee calls attention to the imperative need for the Government to obtain the best possible men not only as directors of the corporation but as its chief executive officers. If the general public is to have any confidence in the proposals, then it must be satisfied that the administrators of the* scheme are men of integrity, thoroughly capable by reason of previous training of taking an impartial and enlightened view of, the matters coming before them, and not having any personal interest. A very grave difficulty arises in connection with the taking over of the securities of existing Government lending departments. At the outset, the whole board of the corporation will be appointed by the State, and that board will have to negotiate the contract to be made with the State in regard to the taking over of these securities. The State will, in effect, therefore, be both vendor and purchaser. Whatever the personal qualification of the hoard members the conflict of interest makes absolutely independent judgment impossible. ‘‘SAFE PROPORTION” QUESTIONED. The very involved proposal under which the corporation will take over all the current mortgages of these Government departments at their nominal amounts, giving bonds to the State “for a safe proportion ” and “ accepting contingent liability ” for the remainder, appears to the to be merely postponing the issue. Further, the committee is in some doubt as to how a “ safe proportion ” is to he fixed. Will this “ safe proportion ” be fixed by the board appointed by the State? Why bury the losses of existing State lending departments for many years? What effect will such an arrangement have on the appraisement by investors of the bonds of the Mortgage Corporation? What will be the position if events prove that too high a proportion of the mortgages has been taken over by the corporation as “safe”? From the phraseology of Mr Coates’s pamphlet, the committee judges that the intention is that the initial amount of this suspense account will constitute 'the State’s maximum contingent liability. The committee is very strongly of opinion that the State s responsibility in regard to existing mortgages should not be qualified in any way, whatever, and that any and all losses arising from these mortgages must be borne by the State. Unless the securities it is proposed tho corporation shall take over from the State can be finally valued by an independent tribunal at the time of taking over, and on a basis prejudiciaL neither to the State nor to the corporation, the function of the corporation in regard to these securities should be that of an administrator and not that of a purchaser. The committee is strongly of opinion that this whole proposal of a suspense account is unsound.