DEBENTURE ISSUES

Otago Daily Times, Issue 18293, 9 July 1921, Page 6

DEBENTURE ISSUES

TO THU EDITOR. SIH, —’i ho correspondence in your columns under the above heading is an indication oi the widespread interest uii in tne matter. The sera s of prospect uses, winch lias occupied so much advertising space in the pa pets throughout the dominion during the past couple ot mouths, has attracted universal attention, and it is only natural that, possible investors should bo asking questions. l our correspondent *' Nemo ” has made the position as regards dillereut c.asscs of debenture;- and the security they oiler very clear in his several letters, and 1 do not propose to traverse the ground he nas covered, more especially as the importance of that inspect ot the matter has aiso been emphasised in articles published by the Mercantile Gazette and otuor papers. The oiler of 7i per cent, or 8 per cent., free of debenture tax, however, is so attractive that it is well t.tat the system of (iiuutoo now toeing pressed upon the attention of tho public should ho carefully examined. It is certain that previous to the publicity given to the matter in tho letters and articles referred to very few of the investors understood what should now bo clear to them —viz., that unless there is a definite registered mortage the debenture-holder has no more security than that held by an ordinary creditor, which is simply tho stability or otherwise of tho borrowing company, with Hie disadvantage that, while, a depositor or ordinary creditor could demand his money at any time, tho debenture-holder must wait, until the duo date. Experience has abundantly proved what most; of us already believed, that tho system of borrowing largo sums of money on tie1, osit at call or short notice is unsound and dangerous, and many companies woud now in a very serious position on this account wore it not for tho protection afforded by the legislation of last session. It is open to serious question whether tho new system of finance may not lead to similar, or equally troublesome, consequences. The fact that in adopting it wo are following the lead of large business houses in the Old Country does not of itself afford any proof of wisdom. The compelling circumstances are tho same there as hero. Is it not possible that tho very fact that, the public is responding so freely to the invitation to pour money into the coffers of the companies is in itself a danger? May not some companies he tempted both by tho readiness of the public to subscribe, and by tho encouragement ot the advertising agents, to borrow more than they can use to advantage? Again, is T at. all certain that the same companies will be in a position at the end of four, five, or seven years (the comparatively short periods mentioned in some prospectuses) to meet the principal which then becomes payable, or are likely to do such business during tho next few years as will enable them to carry tho heavy burden of i 4 or 8 per cent, interest, plus the debenture tax? These questions arc worth considcialiun, aim it may well give not. otny imcstois. but. shareholders, reason to pause when they remember that tho companies have to earn sulliciont net profit to provide: — „ . ~ (1) Interest at ?i or 8 per cent, on the borrowed money, . (2; At least 3s in the £ debenture (or income) tax thereon, . , (3) Graduated tax up to 8s 9d in pound on tne profits shown, and, in addition, U ihc business is not to stand still, to make provision for adequate reserves,—all of tins ooioro any dividend cun, or should, bo paid io shareholders, and without providing tiiukmg Fund towards repayment ot tho Heavy imicDteduoss. . . , in view, uierciore, of the fact that flic ordinary "bonds” or "na;;ed” debentures oner uo definite security, and that tney uo add very seriously to the burden ol tho company, it is clear, to the writer at least, Unit with Uio prospectuses of such issues ic is not sufficient to provide an auditor’s ccruiivaic mat me figures as to Capital aim Reserve “are in accord with the position revealed by the company s books, ' wiucn may mean much or little. There shoulu be published witii tho prospectus at least the last balance sheet of tne company, and tout ol a quite recent date, in order that investors should see for themselves exactly the nature and the book values of the assets, amt tho nature and extent of me liabilities. It is no answer to tills reasonable request to say that the expanse involved is heavy in view of tho enormous amount of money which has boon spent in advertising prospectuses and appeals in various attractive tonus. Especially in those uncertain tunes is it important tiiat investors should ascertain whether the assets consist of stocks dial may require serious depreciation, or advances and book debts that under pressure would involve serious Josses, and whether the liabilities are to secured creditors, to the banner, or to depositors whose claims may be made "all of a heap” when that ■•uncertain certainty” the moratorium, expires. I am, of course, quite aware that some of tho issues are being offered by firms of the highest, standing, but none tho less the forego.ng considerations should weigh with investors, and questions such as I have indicated should not be resented. Moreover, the very success following such flotations may lead to others much less sound. 'i his leads nio to remark that in the New Zealand Herald’s report of the annual meeting of the Farmers' Union Trading Company, tho chairman very strongly resented criticism, lie said: “Wo have been the most talked of. the most adversely criticised, and perhapiqthe most scandalously slandered of any business concern in the dominion. Sinister and unjustifiable rumours of every conceivable description have, been industriously circulated.” This is strong language, and could only be justified if strictly in accordance with fact. Naturally, on reading it, one turns to the balance* sheet, and a very brief scrutiny leads to tho conclusion that some at least of the criticism may have been along the lines I have advocated, and, if so, it has been perfectly permissible when directed towards a proposal offered to the public. 1 note one or two points:

(1) The capital paid up was £411,345, without, any reserve whatever so far as the balance sheet shows, for the profit and loss balance will he practically absorbed in paying dividends and income tux.

(2) The liabilities amounted to . over £943,(XX), which have to bo met in full, while on the othof side assets, amounting to over £1,354,000 (eliminating goodwill and flotation expenses), of which over £672,003 is in shocks of merchandise, etc., contain possibilities of depreciation in value, that might quite conceivably “make a hole in’’ the surplus of £400,000.

(3) The only additional “security” appears to bo the uncalled capital and unpaid <;alls (approximately £160,000) the value of which, in times of stress, there is no means of ascertaining. (4) It is certainly not strong finance for a company requiring additional capital, or l>on-owcd money, to declare dividends of 8 per cent, and 6 per cent, on ordinary and preference shares aggregating about £28,000, when the profit for the year is only £20,179, more especially as no provision is made for income tax on the year's profits. As the issue is reported to have been successful, I cannot be accused of any “sinister” desire to injure it, hut one cannot help wondering if many Otago people sent motley io Auckland for this investntent, or were attracted by the statement in the pro.spse.tus that “Auckland is the safest investment province in New Zealand!” The system of advertising these bonds or debenture issues is certainly open to question, especially the five use of such terms as "gilt-edged security,” and emphasis on the fact tint the debenture holder.; t ome before proft ret ce and ordinary shareholders, with the implied suggestion that in that respect (how are in a IWter position than any other creditors, (’artlcitIt.rlv noticeable have been (ho prominent advertisements of the advertising agents announcing “success ' or over-subscription ;js if (hat, proved anything more than what, (tie chairman of the Auckland fompany, in Ids speech, termed “the psychological 'effect of judicious advertising.” Not (he intrinsic value of what is offered, lint (he skill of (he advertiser! One would not have been surprised to see bonds offered at. £99 ]9s lli<l. «r to the purchaser of a certain quantity e,{ goods!

It is to the credit of the Dunedin .Stock Kx-hange 'hat it has definitely refused to bn mile anv of these debenture issues that do not offer clear mortgage .security under trust deeds.

1 do not for a. moment, suggest, that anv of the companies issuing these bonds is not financially sound. Some of thorn are of tho highest standing and reputation. Pul that does not affect the fact (hat circumstances may alter, and that, without legal security, investors may And in a few ’.ears that, (heir investments have not turned out to hr the sound pm] nation that (lu>y now suppose.

One other point in conclusion. It has no! yet been ascertained, so far as f know, whether the Commission”,- of Taxes will look upon the return from these investments as subject (o the debenture (ax of 8s or to the ordinary graduated tax as being merely interest on loans or promissory notes. It. will make a vital differenc: if he lakes the latter view, fs it, possible that fear of this led one of die firms to state in its prospectus that the ''interest is free of debenture tax up to 3s in tho £,” or (he Gisborne compmy, which offers mortgage debentures, to state that the investment is “free of debenture tax up to but not ex-

reeding the full rate now prescribed by law?’’ What about flic position of the holders of the former if the Commissioner takes the view that (lie coupons are ordinary income or of those in the hitter if Parliament next session does away with debenture tax and makes all income from interest subject to the graduated scale?—! am, etc., F. P. A.