Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, THURSDAY, JUNK 18, 1936. LOAN CNVERSIONS

Poverty Bay Herald, Volume LXIII, Issue 19044, 18 June 1936, Page 4

Poverty Bay Herald PUBLISHED EVERY EVENING GISBORNE, THURSDAY, JUNK 18, 1936. LOAN CNVERSIONS

The Commonwealth Government has successfully carried out. the conversion of London loans amounting to £1(j,551,4();i at (he record low rate of '-':1 per cent, the issue price of £f>S) making the net return to the invcstoi £2 18s lid per cent. New Zealand recently converted £4,000.000 worth o! .stock with interest at .'! per cent and an issue price of £9S 10s, the net yield being £.'', 2s per cent. The Aus tralian loan apparently was oversubscribed by approximately HO pei cent, whereas in the case of New Zealand the underwriters wore left, with more than 'M) per cent. In othei words, whereas the investing public were not prepared to provide £3,000,000 for Mew Zealand, it was willing to make something like £20,000,000 available to Australia, although (he latter country was offering a nominal rate of interest that was J per cent lower. This position, on the face of it, would .suggest that. Australian securities are regarded with a great deal more confidence than those of the Dominion, but before this conclusion can be readied —if, indeed, it is reached at all —there are other circumstances to be taken into consideration. The essential difference between

the two loans is not the rnte of interest, hut the (Into of maturity. The New Zealand stock matures in 22 years, with an optional right of redemption al'te r 10 years, while the maximum term of the Australian issue is seven years, with a right of redemption in five years. The one, therefore, is moderately, long-term issue while the other is for ;i short term, a form of investment which, :it the moment, is very much in favour in London. This difference, perhaps, provides the chief explanation of the Australian success ami the comparative New Zealand failure. Experience has shown that the London market docs not distinguish to any very great extent between Australian and New Zealand Government issues, hut that it is very sensitive to the period of the loan in. cases where the rate of interest is as low as .':! per cent. Four per cent stock of both countries, dated 10-W, is valued at about the same figure, a difference of only a few shilling;; being in favour of Australia. New Zealand .'! per cent stock maturing in 1952, however, is valued at below par, whereas .Australian 3 per cents dated 1939 are sought after at a premium of £2 ss. The discrimination, obviously, is not so much against the country as against the term of the loan. In other words, while 3 per cen-t is regarded as a satisfactory return for the next two or three years, the market believes that better returns will he available before .1952. A rate of ,'U per cent for the next 20 years is regarded as .sufficiently attractive lo command a premium on stock fill filling those conditions, although •! per cent stock with a life of seven years is not worth more than .'LI per cent for the longer term.. These figures are not always easy to reconcile, hut the one fact that does emerge quite clearly is that while investors are not willing to tie their money up for a long period at 3 per cent or slightly better they are epiite prepared to accept that rate for the immediate future, and this fact accounts for the excellent response to the Commonwealth issue on terms that arc so favourable to the borrower. If further proof is wanted that this is the case it is contained in the fact that when Australia, as recently as January last, sought to borrow at an effective rate of £:! 'is per cent for 20 years the underwriters were left with 50 polecat of the offering. None of these consideration*, however, detract in the slightest from the success of the Australian issue. For the Commonwealth to seek a comparatively large sum even for a short term, at a rate below H per cent Was a spectacular venture, and that it has been so successful is a tribute to the high standing of the country's credit overseas. At the same time, there can he little doubt that the offering met with sonic measure of luck, since almost immediately afterwards, as a result of the panic on the Continent, short-term rates hardened to such an extent that the British Treasury was compelled to .pay more than ISs per cent for three months bills—the highest rate for more than two years. Australia was fortunate to have come on the market before litis development occurred, and it is probable that a delay of only twe or three weeks might have made a considerable difference in the results This is borne out by the fact that so soon as the new stock was dealt in it was epioted at a discount, [n any case, the Commonwealth is to be congratulated on the remarkable success that has attended its definnncin" operations in London. In less than four years nearly £200,000,001) of debt has been converted oa vastly better terms than previously existed the external debt has been reduced by £25,000,000, and the interest on that debt is nearly £5,000,000 per annum less than it was formerly.