THE LAST LOAN.

Lyttelton Times, Volume CXIII, Issue 13716, 5 April 1905, Page 9

THE LAST LOAN.

V A-CRITIC CRITICISED. [FROM OCR CORRESPONDENT.] LONDON, February 24. , When the last New Zealand loan was goated In December, the terms of the Joan were, of course, public property in the City, and many financiers, to say nothing of the underwriter's, were naturally interested in the venture, partly on account of the partial novelty of the terms, and partly because of Die remarkable success of the loan. The last mail from the colony having brought the report of the speech in iv’hich .Mr , Massey, at Auckland, criticised the flotation of the loan, I referred his remarks to a City financier of my acquaintance, whom I knew to be In possession of the facts. The passage in Mr Massey’s speech upon which X sought an expert opinion was as fol-lows:-—“At the end of two years the public who took up the loan had the right tp convert their 4 per cents into 31 per cent inscribed stock, with possibly a currency of forty-five or fifty years, and they received in each case a premium of 3 per cent. That was to say, the Government paid 4 per cent, 3.11 a at the end of two years they paid another 3 per cent, which meant 5J per .vent for each of those two years. Ho was inclined to think that this was a higher rate of interest than the colony could afford to pay.” ‘ My friend the financier smiled .slightly as he listened, and was inclined to suggest that Mr Massey might have been misrepresented. “ Because,” said ne, “it does not seem likely that die Leader of the Opposition would have confused principal and interest in so purions a way.”

“Let ns assume,” he went, on, “that a debenture-holder for £IOO converts his stock at the end of tivo years. It is quite .true that he has received 4' per cent interest for two years, and that it the end of that time he will receive £lO3 of 3J per cent stock. But it is, to lay the least of it, somewhat arbitrary to add £3 of this £lO3 to the interest of the preceding two years. The conversion of the debentures into longdated stock at 103 is equivalent to floating the' stock at 97. Now, the proper course when stock is floated at 97 (that is, at a discount of 3 per cent) is, not to add the discount to the first year’s or the first two years’ interest, but to spread it over the whole period of currency of the loan. Therefore the correct way to look at the terras of the loan referred to by Mr Massey is to say, first, that for two years the debentureiolders receive 4 per cent, and for the rest of the term, which extends over thirty-five years, they receive £3 10s on every £IOO stock purchased by them at 97. “To show the unsoundness of Mr Massey’s method, 1 would point out that some years ago New Zealand float- , ed a 3 per cent loan at 94J. That is to say, the loan was floated at a discount of 54 par cent. You might just as well say that the discount in that case should _be added to the interest on the Erst year; in which case Sir Massey might observe that Now Zealand was

paying 8$ per cent interest on the loan • —‘a highep rate of interest than the colony can afford to pay,’ indeed! . “ If, however, w-e are to adopt Mr Massey’s rather peculiar method of loading the first two years’ interest with the 3 per cent bonus, then it works out in this way : It means that for the thirtyfive years thereafter the colony is paying 3§ per cent interest on a loan floated at par,; Mr Massey can have it either way he likes.” “Mr Massey, - ’ I said, “contrasts our last loan with that floated by Natal just afterwards at 3i per cent, and •adds: • ‘ Natal’s credit is not supposed to ho particularly good, and it says little for the credit of Now Zealand that Natal was able to get its money at 3)-. per cent, and that we should pay 4 per cent.’ What do you think of that?”!-:- ■

“As:a matter of fact,” was the reply, “.Natal’s credit is ‘ supposed to bo particularly good,’ and if Mr Massey had looked at the official quotations on the Stock Exchange for the last five years he would have seen that on the average Natal threes have been quoted second amongst the colonial stocks—that is, nest to Canada’s. It has been a neck-and-ncck race* between Natal and New Zealand. To show you the difference between neighbouring colonies, 'I anight remark that I have seen Natal threes quoted as much as 7, per cent higher than Cape Colony’s at the same time on the Stock Exchange. It is true that Natal the other, day borrowed at 3J per cent, but allowing for accrued interest given to the stockholders the loan was floated at about 93J, It, therefore, dees not compare favourably with the New Zealand 4, per cent loan floated at par. Moreover, you have to take into consideration the fact that the New Zealand 4 per cents are likely to bo converted into 3?r per cents at varying prices, equivalent to from 97 to par.”