LOCAL AND DEBT

Otago Daily Times, Issue 22122, 28 November 1933, Page 8

LOCAL AND DEBT

CONVERSION SCHEMES CONSOLIDATION OF SECURITIES TOTAL REDEMPTION t)F LOANS (From (Job Parliamentary Kepoites.) WELLINGTON, November 21. After a period of inaction the local authorities are beginning to make good use of the provisions of tue Local Authorities Interest Reduction i and Loans Conversion Act enabling them to convert their internal loan indebtedness. Thirty conversion schemes are already in hand, covering over £7,300,000 of an internal local body debt of about' £40,000,000. Many other schemes are in process. of calculation, and the indications are that within the next few months large numbers of new issues will be placed before the bondholders.

' Orders-in-Council authorising conversion schemes may be issued up to March 31, 1035, so that local bodies have still 16 months in which to take action. Several of the schemes, of which notice has recently been given in.the Gazette, have, it is understood, been framed ‘in anticipation of amendments to the Act which were introduced into the House of Representatives last week.

One of the principal amendments is that providing for the consolidation of special rates. Many authorities have raised countless small loans on the security of special rating areas, and it was considered desirable that an effort should be made through conversion to consolidate the debt of each authority into one straight-out issue at the standard rate of interest. Since the security rates pledged for special 1 ins were over defined portions of local districts, the consolidation of securities and of security rates was, under the principal Act, found to be impracticable. . It is understood that representations were made by the Municipal Association and by various authorities for legislation to enable the consolidation of special area loans and the levying of a consolidated rate over the whole district of the local authority to be undertaken on conversion. Many authorities have signified their intention of taking advantage of this new provision now before the Souse, and schemes have already been drawn up on the basis of total consolidation.-

The keeping of separate records fop individual loans and the necessity for striking individual security rates to meet the interest and sinking fund on loans have, complicated local body accounting, and it is considered that consolidation through conversion will lead to administrative economy. ( . The advantage of which is being given some emphasis; is that it will enable authorities to discard the sinking fund basis of the repayment of loans in favour of what is called the system of annual redemption of debentures. The principal disadvantages of the sinking fund system which is now in common use are said to be: (1) The uncertainty regarding the future earnings of the sinking funds, and (2) the uncertainty whether sinking fund investments can be realised at the maturity dates of the loans to which they refer. Conversion in the first place gives each local authority an opportunity for extending within reason the dates of the maturity of existing securities so that total redemption’ will be possible at the new maturity dates. Under the system of the annual redemption of debenture* the existing sinking funds "are consolidated and held for the purpose of the conversion loan, and the contribution previously paid each year to the sinking fund, plus the earnings of the existing sinking fund and perhaps portion of the capital of that fund, are used for redeeming a stated amount of the debentures. ■ Each year it is necessary for the local authority to increase its annual contribution for redemption purposes, by an amount equivalent to the interest previously paid on the debentures redeemed each year, but this does not have the effect of increasing the total annual payment, for this amount is compensated by interest saved in the previous year. This system, which is, akin to the instalment or annuity system of repayment, is largely being adopted by local authorities in arranging their conversion schemes. It is advocated as eliminating the unsatisfactory features of the sinking fund system and ensuring a certain return on capital repayments at a rate of interest equivalent to that payable on the loan. The new system also provides for the total redemption of the existing loans within the period of the conversion loan, and this provision, it is considered, by eliminating the renewal loans, will be an important aid to the stabilisation of interest rates.