NO ACTION

Southland Times, Issue 22041, 14 June 1933, Page 8

NO ACTION

POWER BOARD LOANS WISDOM OF CONVERSION DEBATED INTEREST REDUCTION The question whether' it should convert its internal loans which amount to £150,000, or be content with the statutory interest reduction of 20 per cent, was debated by the Southland Electric Power Board at its monthly meeting yesterday. After a comprehensive report by the secretary (Mr Charles Campbell) had been considered, the board decided to refer the whole question to the finance committee and take no action. Mr Campbell’s report stated: — “Conversion of local body loans domiciled in New Zealand is provided for in the Local Authorities Interest Reduction and Loans Conversion Act, 1932-33. The Local Government Loans Board has taken the initiative in urging on all local authorities what it describes as the ‘major and ultimate benefits to local body finance, and therefore to ratepayers generally, which must result from the successful flotation of currency loans.’ But £150,000, that is the Public Trust Office loan to the board, is the only portion of the Southland Electric Power Board’s debt which can be made subject to conversion under the Act. The nominal rate of interest on this loan is 6 per cent, reduced, in the meantime, by 20 per cent, under the above-mentioned interest reduction legislation. Reducing Interest. "The purpose of the Local Authorities Interest Reduction and Loans Conversion Act is to reduce the rates of interest payable by local authorities on loans raised by them in New Zealand and to make provision for the conversion of such loans. The Act really sets 4£ per cent, as the figure below which no reduction should be made; and, though it is not so stated in the Act, this can be accepted as the standard rate in conversion schemes. The Act neither provides that 20 per cent, shall be the maximum ‘cut’ in interest, nor specifically establishes 4} per cent, as the standard rate for conversion flotation issues. Its intention on both these points is, however, clearly indicated. Any bondholder who notifies dissent when conversion is offered is to be subjected to a cut of 335 per cent, in the interest originally payable on his bond. That, considered in conjunction with the legislation authorizing the Government’s own conversion, appears to make it definite that 20 per cent will be the maximum reduction of interest. Conditions are not fixed by the Act, but power is given to the Government to provide by Order-in-Council for the terms and conditions of the new securities as to maturity date, redemption, rate of interest, payment of principal and interest and otherwise. By the same means provision is made for the allowing of premiums on conversion. “The Loans Board in its recent circular to local bodies arrives at the following conclusions:—(a) That 20 per cent, will be the interest cut. (b) Thai 4.} per cent, will be the standard rate of interest, (c) That a capital adjustment will be made where reduction to 4} per cent, involves a cut greater than 20 per cent, in the interest. “A time limit has been put on conversion operations and March 31, 1935 is the final date for the issuing of Authorizing Orders-in-Council. Application To Loans Board. “Each local authority if contemplating conversion, is required to submit an application and a statement containing such particulars as the Loans Board requires. The Loans Board may approve a conversion application wholly or in part, unconditionally or otherwise; it may refer an application back, or may decline to approve it. In every instance the Loans Board must notify the Minister of Finance of its decisions, and the Minister may in due course, whether or not the Loans Board has approved the application submit a recommendation to the Governor-General-in-Council for his consent to the conversion. “The Government obviously wishes to see the stabilization of interest rates at the new low-level basic rate (rather than reliance on the statutory reduction of 20 per cent.) even though, as in our own case there is no material benefit in respect of the present life of the loan. It is a matter of policy. It is plain that the Government does not wish to see the various local bodies loans varying in their rates of interest. The clear intention is that there should be as far as is possible, one stabilized rate of interest for local bodies.” Chairman Outlines Position. The chairman (Mr W. Hinchey), in outlining the position to the board, said it was the desire of the Government that local bodies should convert their loans to reach a uniformly low level of interest. Were the board to convert its internal loans the interest would be 4| per cent.; if it did not do so the interest rate would be 4.8 per cent. The difficulty was that in the case of conversion premiums amounting to £7OOO would have to be paid. In that case the board would be worse off than if it accepted the 20 pei - cent, statutory reduction. His own feeling was that the board should just accept the statutory reduction and he did not think the Government would worry. “I don’t think we should dismiss the matter,” said Mr W. McChesney. “I don’t think anything should be done until we get more particulars, or until the Government shows an intention of fixing the interest rate for public bodies. It is possible that the statutory reduction will be reviewed by Parliament next session.”

“There is no possibility of that,’’ said Mr A. A. Mac Gibbon, “but the investor always thinks so.” “I agree with Mr McChesney,” said Mr J. T. Carswell. “The statutory reduction may be reviewed in three years. It might pay us to convert.” It was then decided to refer the whole question to the Finance Committee, without taking any action.