LOAN CONVERSION

Otago Daily Times, Issue 22366, 13 September 1934, Page 6

LOAN CONVERSION

CITY'S SOUND POSITION RESULT OF PAST WISE POLICY COMMENTS BY CR A. H. ALLEN That the city of Dunedin is reaping the benefit of the sound financial policy of past City Fathers was shown by the chairman of the Finance Committee of the City Council (Cr A. H. Alien) at last night’s meeting, when he commented on the sound position of the corporation with respect to the conversion of its loans—a conversion, as he pointed out, which is larger than that of any other local body in the Dominion. Cr Allen showed that the wise policy of borrowing of past councils made it possible for the Dunedin City Corporation at the present time to take the fullest possible advantage of current conditions and enactments at a minimum cost in the matter of inducements to its bondholders to convert their holdings to a lower rate of interest.

In connection with the city’s loan conversion scheme, Cr Allen said that a start was made on September 1, and already the Finance Committee had received assent in the matter of conversion for amounts totalling approximately £1,000,000. The total sum covered by the conversion operations was £2,214,700, which represented easily the largest conversion operations by a local body in New Zealand. Auckland came next with a total amount to be converted of £1,797,000. A perusal of the notifications regarding conversion schemes as published in the daily press afforded an interesting opportunity for ratepayers to study and compare the methods employed in Dunedin and those adopted elsewhere. Most of the notifications indicated that a premium per £IOO was payable to holders on conversion, this premium being based on two factors. In the first place regard must be had to the difference between the original rate of interest, less the statutory 20 per cent, reduction provided by law, and the 4$ per cent, interest payable on the new debentures. Secondly, the unexpired term of the debentures had to be taken into account. It _ followed, therefore, that a lengthy nnexpired term plus a high rate of interest connoted a big premium. Dunedin had generally borrowed in the local market for long terms when money was cheap and for short terms when money was dear. Consequently no high premiums had had to be paid. The highest premium that Dunedin had had to pay on conversion was £1 19a lid, but even that amount was offset by the fact that on many of their conversions they had not had to pay any premium whatever. This position was in marked contrast with the plight of some other local bodies which had been compelled to pay heavily. Some had found it necessary to pay as much as £lO and £l2 per £IOO, and in that morning’s paper there was an advertisement by one public body in New Zealand which offered a premium of £l3 17s as an inducement to its bondholders to convert their holdings to a lower rate of interest.

“It is, indeed, fortunate,” said Cr Allen, “that a large proportion of our debt is domiciled, in the Dominion, and that we have in the past adopted sound principles in our borrowing. For this I think we are indebted to the foresight and vision of past councillors, and I feel that this council and the city should not lose sight of how much they owe to them.”

Gr MTndoe, in referring to the remarks of Cr Allen, said that it must be very gratifying to the ratepayers of the city to know that the municipal finances were in such a sound position and that they had been able to make the fullest use of the recent financial legislation. There were some other centres that would gladly be in Dunedin’s place at the present time. Some of them may have expanded and progressed faster than Dunedin had done, but they were now carrying burdens which he was glad to say the ratepayers of Dunedin did not have to shoulder. On the contrary, the position .in Dunedin was such that they could confidently look forward to a reduction of the interest burden and a steady improvement in city, finances. For this they were indebted to the wise policy of past councils, and he did not think that that fact should be overlooked.

Cr Silverstone: For once’ Cr MTndoe agrees with me. He favours partial confiscation. • t

The Mayor said that there was no doubt that the city’s finances had been well handled in the past, but’he doubted whether tho proposal of the Finance Committee to give away the right to purchase hack debentures after 1940 unless it were within three years of the expiry date in 1958, was in accordance with those wise and prudent policies of the past. Why should they relinquish the right to buy hack their debentures at any time? It amounted to giving away a civic right, and it seemed less than wise to him.

Cr Allen said that the only way they could keep faith with their bondholders in the matter of the term of their debentures was by making the provision proposed. He submitted that it would not be fair to those from whom they borrowed the money if they bought back their debentures at a time when money was cheap regardless of the position of the debenture holders.

The Mayor said that he could not sec that there was any difference between taking money from their bondholders at the present time through the medium of reduced interest rates and reducing the term of debentures later on.

Cr Allen’s reply was that there was a wealth of difference.

The proposal as submitted by the Finance Committee, which read as follows, was then adopted;— The prospectus of the city’s conversion scheme contained a provision reserving to the council the right to repay any debenture that is set to mature after 1940, at a date prior to the maturity date to he shown on the new debenture. The option might be exercised in a variety of ways, and, as the maturity dates of the new bonds after April 1, 1940, extend to April 1, 1958, there is a range of 18 years during which the council might, or might not, determine to exercise its right of repayment. It is now felt that this arrangement does not sufficiently conserve the interests of the bondholders, due to the uncertainty of the currency of the bonds, and that the fairer way for the council to exercise any option would he to express on all bonds maturing after 1940 thg right to repay at any time within three years of the new maturity date. In that event tho holder of a bond set to mature on April 1, 1958, would be assured that hie investment would run to within three years of that date for certain, and the market value of the bond for resale at any time during the period could be calculated with certainty. As it is desirable that the interests of the bondholders should he fully conserved, the proposed alteration in the provision for exercising tho option, as above outlined, lias been approved.