CONVERSION LOAN.

New Zealand Herald, Volume LXVIII, Issue 20897, 12 June 1931, Page 11

CONVERSION LOAN.

GENERA'j CONDITIONS. LOWER INTEREST YIELD. TEN MATURITY DATES. By Telegraph—Press ABSociation—Copyright. (Received June 12, 12.25 a.m.) MELBOURNE, June 11. The general conditions of tho conversion loan have been approved by the Federal Loan Council. Holders will io invited to convert their holdings into ho new stock, and upon conversion all sxisting securities will be subject to a g( neral reduction of 22£ per cent, in the interest yield, except in tho case of holder.' of tho 3, and 3J per cent, stocks, • vho acquired these securities before August, 1915. Tho new secirities are to be restricted to three flat rates of interest, 4 per cont., 3| per cent., ! nd 3 per cent., and to be spread over 1C fixed maturity dates, subject to the Government's having the right to redeem after December, 1950. The existing securities, amounting to £450,000,000, Hearing interest at 5i per cent, and ovc.", aro to bo converted into 4 per cent, stock at u premium. As a gener il rule each holding is to be spread equally over the 10 maturity dates. Conditions aro also laid down dealing with the existing securities, amounting to £45.000,000 at 5 per cent, and £61,000,000 at lower rates. Interest on the new securities will bo exempt from the Commonwealth supertax of per cent., but will be subject to other existing Commonwealth and State taxaticn. Provision in also made for the conversion of tax-free securities on a voluntary basis DETAILS OF PLAN. COMPLICATED UNDERTAKING. THREE CLASSES OF NEW STOCK. The proposal to reduce the interest charge on Government stocks held in Australia has presented an extremely difficult problem for the Premiers' Conference and the group of financial and economic experts associated with it. The original proposal was to convert all existing stocks :.nto one consolidated stock bearing interest at 4 per cent., with a currency of 40 years. Last week, the conference adopted a plan submitted by the committee of under-trcasurers providing for three classes of stock with different rates of interest, and currencies ranging from seven to 30 years. The final details of the scheme had not been elaborated when tho last mail left Sydney. Existing stocks carry interest ranging from 3 to per cent. The basic principle appears to be that the interest return to individual: holders shall in every case be reduced bj' 22£ per cent. This will be effected by conversion into new stock, in some cases with a small increase in the nominal value of the holding and in others with a small capital reduction, based on actuarial calculation. Classification of Debts. The sub-committee said it was convinced that it would be impracticable to make the adjustment merely by a variation of ir.terest rates. In every new rate there would be broken pence. This would involve much trouble and expense in administration. Moreover, as it was necessary, in view of the large sum involved, to spread the maturities over about 10 fixed dates, the number of existing stocks and maturities would virtually be multiplied by ten. As the chief objection _to variations in the principal sum arose in cases where discounts became necessary, the undertreasurers made an effort to evolve a plan that would provide:—(l) A limited number of securities; (2) even rates of interest; (3) the elimination of issues at a discount. The sub-committee reported that the debt of £556,000,000 was divided as follows £450,000,000, carrying rates between 6i to 5i per cent.; £45,000,000, at 5 per cent.; £30,000,000, at 4j to 4 per cent. ; and £31,000,000, between 3| and 3 per cent. Subjecting these groupings to a 22J per cent, reduction, the committee decided to recommend that the conversion should be covered by three fiat rates—4, 3 7-8, arid 3 per cent. Various Options Proposed. The existing securities, carrying 5] per cent, and over, are to be converted into 4 per cent, stock, each issue carrying a small premium in conversion; the 5 ner cent stock to be converted at the option of the holder into 3 7-8 per cent., maturing in 13 years at par, or 4 per cent., at a 'small discount; the remaining sccurities—£6l,ooo,ooo now bearing interest at less than 5 per cent., to be converted at the option of holders into 3 per cent., maturing in seven years and 16 oi into 4 per cent. If converted into 3 er cents., the existing 4J to 4 per cent stock will receive, a small premium, and The conference decided tl at to facii tate the ssue of new securities, a • tionß below £lO should be ; subject to holders being entitled to con tribute Cf.sh to make up the next higher £ The currencies of the new stock projno wsic as follows: Seven years 4 and 3 per cent.; 10 years, 4 per cent 13 years, 4 and 3 per cent.; 16 years, 4 and 51 per cent.; 19 years, 4 per cent 22 years, 4 per cent. ; 24 years 4 per cent.; 26 years, 4 per cent , 28 years, per cent.; 30 years, 4 and 3 pe. cent. An elaborate sot of lecommendations regarding tax-free securities was made by flic committee, but the conference had not reached any conclusion on this proiloin l>y the cud of the week. Exemption From Taxation. One of the. committee's proposals was that the interest on the new securities should bo free from the present Commonwealth super-tax of 7* per cent, and from any further taxation which may be imposed bv the. Commonwealth or by any state, but to bo subject to other existi„g Commonwealth and State taxes. 1 his was criticised by Professor Giblin, who said the conference should cons ] K j® l whether it was not piling up a very difficult problem for the future. If they were go.ng to make loans free of taxation for 30 years, they might be making a serious problem for the people 10, lb or 20 years hence. There was a considerable body of opinion which held that inlcrest rates wero going to fall considerably after the present crisis was over and the/ might bo saddled with interest of 4 per cent, up to 30 years when the market rate was something like 3 per cent He thought the conference should introduce a provision that all these bonds could be paid off after 10 years at tho option of the Government, or, alternatively that the freedom from future taxation should bo limited to a period, say, of 10 years. If either of these proposals was embodied, it would safeguard the future. However, the conference accepted the committee's recommendations regarding exempt:,on from taxation, but with piovision :;hat the Government should have the right to redeem stock aftor 1950.