WAYS AND MEANS.

Dominion, Volume 6, Issue 1784, 24 June 1913, Page 6

WAYS AND MEANS.

RAISING A BIG LOAN. HOW IT IS DONE. CAUSES OF RECENT FAILURES. The recent failure of several 'important loan negotiations in the British moneymarket has given rise to some interesting discussion' in London. Apropos of the fate of the big- Brazilian loan, tho ''Daily Mail," in a special article, remarks that tlio business of advertising the security and general attractions of largo fitato loans does not eeem 'to have been iully grasped by the promoters. ' Til!) fate of tho Brazilian loan, even, although it was floated under Kothschild auspices, shows that the public is not attracted, tund so does the failure of )uany other loans that preceded it (says the "Daily Mail"). Hero is a table of recent loan issue failures which shows how much of the amount it was attempted to raise was actually subscribed by the public and how much the financiers had themselves to find because the public refused to lend it; — ■■ . ' ~ .., Subscribed Left with, by niuler-

Thus in tho issue of these nine recent loans the publio was invited to subscribe •C 27,168,000. It responded to the amount of only X2,801,G00, or about one-tenth, leaving no tess than <£34,366,400 in the hands of the underwriters. Why this Indifference? How'is it that the public refuses to subscribe to a good investment, even although the first financiers of the land, with all their ability, are willing to ensure that they will take .it? How is it that the shares of some pushing speculative company, with.doubtful prospects, may be readily subscribed or bought, whilo firstclass investments, such hs those here mentioned, are' ignored? "Without the possibility of a doubt, tho . public is not made sufficiently aware of tiio opportuntlieso investments. ". .. As a Title, because of the dugnity or something of the sort of those responsible, tho loan issues are grossly under-advcrtis-ed. The experienced financier, tho carelul reader of City- articles, and so on, may realise their< attractions, but they aro.pot properly explained to tho great public, and the issuing houses will not stoop from their pedestal to.explain, ahus the sound lean-is pushed aside, by tlie rnoro enterprising company-monger, marlcetmaker, or bucket-shop keeper, who knows how to present his wares attractively. The brief technical prospectus issued by tlie representatives of nations and States and makes no appeal to the . great public, with the result that it holds aloor. And in itself having to find the vast gums renuired the financial community plunged into danger. v

Behind the Scenes. The underwriters aro tliose professional financiers, who agree with the hnaiiciaL house which manages the issue of the loan to subscribe, in consideration of receiving a commission, .any part of the loan whicii the public does not subscribe. M a great financial house is making a loan issue -it communicates with its client Je, collating.of other financial houses, stockbrokers, and" so on, , and they each mako themselves responsible tor the subMtiption .of part 01. the loan until tha whole amount is underwritten, ihe writing commission offered . varies-fnreatly .in accordance with the na toe of the issue and of .the P^™ e ?- tion it is likely to receive. In the> ca-o of very speculative shares it may be 10 or 15 per cent., but in the case of highclass securities such as those which ha\o just been mentioned the commission nearer 2 or 3 per cent. omnnnn nf a Sav a firm underwrites £100,000. ot a 10-iu and the underwriting commission is 2 per cent., then that firm immediately becomes entitled to tho wmmi«.on of MOOD whatever happens.•• Then tho pro pectus is issued inviting the l' ubi J c H t ° subscribe. If the wholo amount of tho loan ds subscribed the t T ] lO loan is Sbscribed by the public .then the amou^t^n^ropo^io^to^^anw 1 ' 11^ S*«i a. has underwritten, which means thatit ha to find while receiving its «(H)0 com imrsln* that amount of tho loan. As xne table above shows, the under'wi ers o the Brazil Rothschild loan had to find between them, in this way the sum ot is usually .taken * ly, but "naturally enough in the condition of things underwriters are, becoming overburdened; in some cases thciL resources are strained. In fact, as ita» stated at the outset, financiers aie legating the position with some trepidation. Underwriting goes on because the underwriters cannot well stop, ine Jinancial houses are .expected by each other to support each other as occasion rises. Even if one of thenj feels weak and would rather not take the risk involved in sricli times, as these, he dare scarcely refuse tho invitatiftn of tlio bu. issuing honsw to underwrite its loan because if he does he may quite probably find that he has been struck off its. list and that when business ot a 'novo V'' - niising and profitable nature has to be done he can obtain no share m it.

Where the Money Comes From. AY here tlo the underwriters get the money and'what do they do to relieve themselves eventually of. tho burden of ] the stock for which they have been compelled to subscribe?/ the answer is that many of them are very large MSI™*1 ™* ists with enormous resources, and, is more useful still, with almost "unlimited credit. If. they have no available, funds they borrow from ' their • banks, whero lie tho unusad lands ot the whole mttion. For tho loans they may obtain from their bankers, to pay for the stock they have bad to take, they may ueposit that very stock as security-they pawn it and get it out as they can repay tho money. . . They are enabled to do this by gradually selling tho stock to investors who come forward by degrees to buy it. Naturally in 6uch circumstances when the supply obviously exceed? the demand the tendency of the price is to fa", but if tho underwriters can hold on the> cet out of the transaction at some profit. Suppose the stock is oifered to the public at 93, tho underwriters, counting their - per cent, commission, obtnin it for Jl, so that they can afford to sell it at J-. because, although that is below tho isaiio price, it is moro than they paid for it. But against this hope of getting out all right there is the strain of tho lock up of resources, and at the present time financiers are groaning under it, and tho position might be<!omo dangerous.

' Loan. public. writers. £ £ Brazil 660,000 • 10,3-10,000 Edmonton .... 213,600 cnA'nnn Grand Trunk Pacific 100,000 1,600,000 Madras & S.M. By. 250,000 2,250,000 Madeiro-MamoreRy. 208,000 .1,392,000 Ke\v South Wales ... ISO,000 2,520,000 State, of Bahia 150,000 „§m'SS? South Africa 180,000 2,820,000 AVest Australia ...... 260,000 : 1,7^0,000 Total .£2,801,600 .£24,366,100