WELLINGTON NEWS

Hokitika Guardian, 25 July 1928, Page 1

WELLINGTON NEWS

LONDON AND NEW YORK LOANS

(Special to “ Guardian.”)

WELLINGTON, July 23. The Commonwealth Government has, within the last three months, floated loans in New York and in London, and the experience of the Federal Government has been rather disappointing, for the credit of the Commonwealth has been somewhat impaired. The whole trouble arises from the fact- that the methods of loan flotation in the two capital cities vary considerably. The New York procedure is for the borrowing State to offer the loan to a syndicate, or to put it the other way, a syndicate of financiers and bankers buys up the whole issue. Thus in May last the Commonwealth Government offered a per cent loan for 50,000,000 dollars (£10,000,000) and this issue was bought outright by a syndicate headed by J. P. -Morgan and Co. The price paid by the syndicate was 92 j dollars for every bond of 100 dollars and thoiCommomvealth Government had to pay 2} per cent commission so that the net rpice to the Federal Government was 20 dollars for every 100 dollars bond. Two points must bo noted, the first is that the issue was not underwritten as is done in London, hut the definite purchase of the entire issue is equivalent to underwriting, which after all means guaranteeing that the borrowers will receive the money ;'the onus of selling the bonds to the public rests with the members of the syndicate. The other point is that Australian loans issued in New York are not trustee securities as they are in London. Last week the Commonwealth Government floated in London a 5 per cent loan for £7,000,000 with the issue price at 98 per cent, and the loan was underwritten. The procedure in London is

for the loan to bo offered at the issue price to the Federal Government was £9B for every £IOO stock, and any portion of the loan not taken up by the public is taken up by the underwriters who were left with 87 per cent of the loan under discussion. The loan was a trustee security, that is those administering trust estates were privileged to subscribe for the issue, and this is an important advantage. It now becomes the task of tin/ London underwriters to get rid of their holdings. They can do this by degrees at the issue price of 93

or they may accept less, this being possible been use the underwriters received a commission of about 1£ per cent for doing the underwriting. They could sell the stock for 97 and still make a profit of j oer cent. That is they have a margin of 1 j per cent to work upon, but experience shows that such colonial issues are eventually absorbed hv the underwriters who incur no loss or if a loss then a very small one. It is an ordinary trade risk. The position is very much the same with the Now York syndicate. On the Commonwealth loan the syndicate received per cent and if they sold the bonds at 90 they made no loss, but above or below that, figuro meant profit or loss. An ugly position developed‘in New York for the bond market. For some months there has been a fierce gamble going on in Wall Street Stock Exchange, and the great outside public have taken a hand in this. It is said that men and women have been withdrawing the hard-earned savings from the savings hank to gamble on shares, on margins, that is they do not pay for the shares outright hut deposit a certain sum with the broker as a margin against the fall in prices. If the shares fall and are resold the margin cover is lost, if on the other hand tliero is an advance in the price and they are sold at the advance there is a profit. In this gamble it Is shares, or in American Stock Exchange parlance, common stock that have formed the counters and not bonds. So the syndicate tiiat took up the Commonwealth bonds could not place them with the public, and to attract buyers prices were reduced. The bonds which cost the syndicate 90 dollars per cent were hawked in New York and London at 87 dollars, and naturally this had a depressing effect on tfie Commonwealth loan issued in London. Furthermore

the gamble in New York has caused money in that centre to advance, and money at call was as high as 7 per cent. The re-discount rate of the Federal Bank of New York is now 5 per cent, and there are expectations that it will go higher and if it does so it will cause a disturbance on the London and other European markets. The Commonwealth was really unfortunate with its loan issues.