LOCAL BODY LOANS

Otago Daily Times, Issue 22392, 13 October 1934, Page 18

LOCAL BODY LOANS

INVESTORS PERTURBED OPTIONAL MATURITIES. A comparatively recent innovation in local bodies' conversion orders, introduced by Order-in-Council, is giving converter of and investors in such loans considerable food for thought. The clause is as follows: — Provided that in respect of any new security the specified maturity date of which is a date later than the thirtyfirst day of March (usually 1940 to 1945), the local authority may stipulate in such new security for the redemption thereof, at the option of the local authority, on such date prior to that so specified (but not earlier than the * thirty-first day of March, one thousand nine hundred and- forty), as the local authority may fix by notice m that behalf to be published in the Gazette at least six months before such prior date. Under the, impression that every new security shall be redeemable at par on the due maturity date or approximately at the same date as the old security, .convenors and investors have taken up such securities in all good faith, that if they mature in, say, 1950, 1956, or 1961, whatever the year may be, they will be redeemable then and in no other year. Financial arrangements have been made and plans laid accordingly, but it now appears (says the Evening Post) in respect to certain loans that the borrowing authority may vary the years of maturity of their loans by giving six months' notice to the debenture holder. In other words, the borrower can take advantage of an option inserted in the conversion order by Order-in-Council. For instance, although a local authority's converted loan may not mature until, say, 1950, that authority, under the Order-in-Council mentioned, is at liberty in, say, 1939, to give notice to the holder of the security that the loan will be redeemed in 1940, notwithstanding that the holder originally acquired and converted that security in the belief -that it would not mature until 1950. It is the fact that the holder mad have dissented from the conversion, but this action involves a penalty of 33 1-3 per cent, on his interest. The Order-in-Council is regarded as a most one-sided arrangement, for the holder of the debenture is not enabled to have it redeemed before its due time; but the borrowing authority may redeem it, if it thinks it convenient to do so, and in the event of the money market falling lower in 1939 it-could hardly be expected to refrain from terminating the loan. But, if the price of money advanced and securities of this sort are appraised at, say, 5 per cent, per annum, the debenture holder has no choice but to hang on to his 4£ per cent, security. Moreover, in such instances it would appear that provision made for income of families, business firniß, or other concerns investing in certain local body loans oh the assumption that the redemption of the debentures will be made in the year stated on them, is likely to be upset should the borrowing authority exercise its option of redeeming the loan sqme years earlier than the lenders or debenture holders anticipated and provided for. The matter is ut present engaging the close attention of stockbrokers and their clients.