THE H.B. TRIBUNE THURSDAY, SEPTEMBER 29, 1927 LOAN-FLOATING IN NEW YORK

Hawke's Bay Tribune, Volume XVII, 29 September 1927, Page 4

THE H.B. TRIBUNE THURSDAY, SEPTEMBER 29, 1927 LOAN-FLOATING IN NEW YORK

A Sydney business man who has been studying financial conditions in Great Britain and America lets in some little . light upon the different methods adopted in London and New York in handling big loan issues from abroad. In the first place, he points out that the heavy “oversubscription within an hour” announced in connection with the Commonwealth’s recent 40 million dollar loan in New York was likely to be misleading. In London, as we know, colonial loans are “underwritten” by strong financial operators, who thus virtually guarantee’ the saccess of the issues. The loan is then offered to the public at the set guaranteed price, and only the applications of bona fide outside investors are notified as subscriptions. In New York, however, loans of this kind are committed in the. first place to one or two of the well known big financial houses undertaking that kind of business, who then enter into negotiation with other concerns of the same kind. The result is that, in the main, the primary “subscriptions” to these loans are not from the investing public, but from a few selected firms who make a business of “bond-dealing.” It is these latter who then proceed- to retail the bonds to the public, usually at some substantial advance on the nominal issue price. The loan bonds are thus, in the first instance, the medium of purely speculative buying on the part of the underwriters and their big financial friends.

Foreign loan issues are, in effect, handled in New York in much the same way as merchandise. They are underwritten or bought by the investment banker and sold by him' and other investment bankers to, the investor, the difference between the price paid and the price received being known as the “spread.” Naturally, the underwriter is anxious to have a “spread” sufficient to pay the high cost of distribution still leave a satisfactory margin of profit- There are, we are told, at least five investment bankers in New York capable of handling Australian loans when the money is not available in London. But it has been definitely proved that the only way to get the highest price is to accept bids from each of these powerful bankers, giving the business to the highest bidder, and refusing the sealed bids of hankers whose standing does not indicate their ability to handle the issue.

The Sydney investigator says that the opponents of this method of '‘competitive bidding” have two stock arguments against it, the first being that some bankers wil 1 not bid, and the second that

one banker always acting for Australia will “look after the market.” With regard to the former, the bankers ostensibly refusing to bid generally arrange to bid through and with a friendly competitor, and the so-called advantage of having someone to look after the market is no advantage at all. “Looking after the market” is the practice of stabilising prices byabsorbing surplus bonds in order to prevent damage to the borrower’s credit by a fall in price, and supporting the market when necessary, and especially before a new issue. This sort of thing costs money, and might be very costly if the bonds cannot be placed again soon after purchase.

“In order to get this service and so-called great advantage,” says the Sydney man, “we are expected to forfeit our right to get the highest price by inviting competitive bids, although we know quite well that any cost to the banker must be taken into account when the next issue is made. As we must pay indirectly for the service, why not pay directly, and obviate the necessity of forfeiting our right to sell our bonds to the highest bidder!”

We have been led to think of New York as having an inexhaustible reservoir of free capital that only needs to be tapped in order to get the flow. But this Australian enquirer finds that such is by no means the case, and there are not altogether infrequent times when, owing to heavy undigested holdings by these bond-dealing houses, there would be extreme difficulty in floating a new loan excepting on most unfavourable terms to the borrowing country. He avers that the Commonwealth’s seven million (sterling) loan that met with such a poor reception in London a few weeks before the New York flota tion could not, at the time, have secured even underwriting in the fetter market. Another feature that has to be taken into account lies in the fluctuations in exchange. These may, of course, go against a debtor country having payments to make even in London. But this danger is regarded as nothing compared with that of having to settle in New York when exchange is running against the payer. For these and for other good reasons adduced the advice is given to limit recourse to New York to the utmost possible.