THE FOUR MILLION LOAN.

New Zealand Times, Volume XXX, Issue 4475, 23 July 1875, Page 3

THE FOUR MILLION LOAN.

IMPORTANT CORRESPONDENCE. An important correspondence was presented to Parliament yesterday relative to the negotiation of the £4,000,000 loan. The first portion of this refers to the absolute RAISING OF THE LOAN. Writing on the 19th of March from London to the Colonial Secretary, the Crown agents, Messrs. Julyan, Featherston, and Sargeaunt, say : We have the honor to acknowledge the receipt, by the hands of the Hon. Julius Vogel, of the Order in Council, dated 10th September, 1574, appointing that gentleman and ourselves joint agents for raising four millions sterling under the Immigration and Public Works Loan Act of 1574. As the order referred to contained no direction as to the date at which the Government desired us to negotiate, nor any intimation as to whether we were expected to place the loan upon the market by one or more operations, we were necessarily governed upon these points by Mr. Vogel, and from him we learned that the liabilities of the colony were such as to render it advisable that the whole amount authorised by the Act should be disposed of by one operation. Being aware that a portion of the last issue of New Zealand debentures was still in the hands of speculators, and that the demand for those securities was of a very limited character, it was evident to us that It would be hopeless to expect the open market to at once absorb so large an amount, and we had therefore no alternative but that of resorting to a contractor or syndicate. To forsake the old channel through which your loans have hitherto been so successfully placed upon the London market, and to resort to either of these expensive, and by no means popular, agencies for dealing in loans was a step that nothing could have justified our acceding to but the absolute necessity under which we were placed of immediately raising (or procuring a guarantee price for) at least double the amount that the public were prepared to lend. Of the two agencies named, we should have preferred the syndicate, as presenting to the public no apparent deviation from previous practice, and as being in all probability less costly-, but after breaking off our first negotiations with Messrs. N. 31. Rothschild and Sons, because they declined to give more than SS net for a 4fc per cent, loan, we found a syndicate unwilling to guarantee an acceptable price for more than one-half the amount required, and we had consequently to revive our negotiations with Messrs. I Rothschild, which resulted in their accepting our offer at 91 net. The enclosed copy of contract entered into with that firm, and copy of advertisement enclosed, will place you in possession of the terms upon which we have disposed of debentures representing four millions sterling, redeemable at par, in not less than five nor more than thirty years from the Ist of February, and bearing interest from the Ist of March, 1575, at the rate of per cent, per annum. The reasons which originally lod to the adoption of 4J per cent, as the rate of interest most advisable for "New Zealand loans, have been fully explained in previous correspondence, and it is only necessary here to add that recent experience has tended to confirm our belief in the wisdom of adopting that rate. . From the documents just referred to, it will be seen that the loan has been negotiated at a rate which, after deducting allowances and commission, will secure to the Government of New Zealand a net sum of about £9l in money for every £IOO of debt incurred. At this rate the borrowers will pay (exclusive of the loss on redemption) about £4 18s. lid. per cent, per annum for the money obtained, and the lenders will receive (exclusive of gain or repayment) about £4 17s. per cent.: the difference being due to the expense attending the issue. We have been informed by Messrs. Rothschild that they have allotted the whole £4,000,000, and the enclosed return shows the amount paid to the credit of the New Zealand public account at the Bank of New Zealand up to the present date. As the value of money on short loans in the open market is less than that allowed on instalments paid in anticipation of the dates prescribed by the contract, it is probable that a still further amount will be paid in advance. Out of the money so received, we have already paid off £280.000 of temporary advances obtained from the Bank of Enaland on the security of guaranteed debentures, and we purpose paying the remainder (amounting to £380,000) at intervals, as it falls due, between this and the 15th May next. Having freed these securities from all liability, they will be placed on deposit, as before, in the Bank of England, subject to the joint order of any two of the loan agents, to be dealt with as the Government of New Zealand may hereafter direct. Had circumstances permitted us to negotiate the loan in two equal parts, with an interval of nine or twelve months between them, we believe that we could with success have appealed direct to the public, with a very considerable saving to the colonial exchequer, and with the probable advantage that only a comparatively small portion of the loan would have fallen into the hands of speculators. Under the present arrangement, we are ignorant as to the character and number of the subscribers, and as to the amount actually taken up by the public ; but reports current in well-informed circles incline us to believe that the greater part of the loan is now held on speculation, and will for a long time to come be pressed upon the market whenever remunerative sales can be made. Until that process is ended, if our surmise be correct, it appears to us, so -far as it is possible to judge of the future, that the Government of New Zealand will act wisely in abstaining from all attempts to place upon this market any further loans. The most immediate effect of the line of action that we have adopted appears in the depreciated value of the new debentures. The net market price of the New Zealand H per cents on the Ist February was 97, whereas (without any change for the worse having taken place in the money market in the interval) the rate at which the public were invited to subscribe for the new loan was 94, with deferred payments, virtually reducing it to 93. This depreciation of 4 percent, below the previously existing price, with certain rebates in the shape of commission, was the highest point at which the contractors wonld undertake to guarantee the taking up of the loan ; and these conditions were considerably more advantageous than we were at one time led to expect. The terms upon which this transaction has been carried out appear to us, indeed, to. be exceptionally favorable, when it is considered how recently the previous loan was negotiated, how large is the present operation, and how prejudicial were the circumstances by which it was surrounded. Comparing this negotiation with those for identical securities which have preceded it, and excluding from the calculations the incidental expenses—such as printing, advertising, stamping, &c, which are in much the same proportion in all cases—the results are

In disposing of more of the colony's securities than the market was able at once to absorb, it became absolutely necessary to make such a reduction in price as might on the one hand, if possible, tempt the general public largely to invest their money in these debentures, or as might on the other hand induce speculators to purchase them with the prospect of selling hereafter on beneficial terms. It must be remembered, however, that the higher price (£97) was on retailed transactions, relating to small sales of £SOO and upwards ; whereas the lower price (£Ol, virtually representing £93) was a wholesale one, put forward with the view of inducing subscriptions to the extent of £1,000.000 sterling. We regret extremely that Mr. Yogel so far dissents from the opinions expressed in this report as to decline joining in it. We understand, however, that he will express his views in a separate report, and we have thought it right to furnish him with a copy of this, though we regret that the time occupied in trying to reconcile conflicting opinions has rendered it impossible for ns to do this until the afternoon of this day. Sir Julius "Vbgel, writing on the 18th March to J>r. Pollen, says that he finds it desirable to separately report on the sale of the four milion loan. His reasons for taking this course are as follow: — On the afternoon of the 9th instant, just before tho closing of the C'alifornian mail, tho draft of a letter to you, prepared by Sir Penrose G. Julyan, was bnnight to me by Mr. Sargeaunt and Mr. Featherstbn, to be approved for transmission by the mail- I pointed out that the calculations, and tho inferences drawn, were incorrect, and the draft was taken away. On the afternoon of the I7th, I received two documents—one, the draft of a report which I was asked to sign ; and the other, a copy of a letter already signed by the other three agents. My opinion of these productions may be gathered from the letter I addressed to the three agents, a copy of which I send you. I also forward to you a copy of the copy letter sent to me. You will observe that I have undertaken to reply to that letter. If the letter had been signed by Sir P. CI. Julyan and Mr. Sargeaunt alone, it would have been worthy of little remark, for it would only have appeared to be an eager bid for securing the negotiation of futuro loans. The addition of the Agent-General's signature gives to the letter another complexion. I confess to feeling great surprise at his having signed the letter; and, of course, the- letter borrows such weight, in consequence, as you and others may be disposed to accord to it. I shall probably take another opportunity of placing on record my recollection of what took place between the agents during the negotiation of the loan. I had immense difficulties to contend with, in tho natural reluctance felt by those interested in colonial loans to seeing such a house as that of Messrs. N. M. Rothschild and Sons embarking in the business. Sir P. G Julyan so conducted the negotiations with that house as to lead to their utter break-down. I took them up, and, with Mr. Fcatherston's assistance carried them to a result which those persons who have spoken to mi on the subject havo told me they consider a bitfliant success. I was under tho impression that Mr. Feathorston coincided with me, and I was amazed at seeing his signature to tho letter. He has told me that he has not actually signed the letter, but ho does not withdraw it; and it la incredible that Sir P. G. Julyan and Mr. Sargeaunt would have attached his signature without considering they had authority to do so. At present, I only observe upon the letter to say this—that the insinuation that Mossrs. Rothschild and Sons only bring out the loans of embarrassed States, or that it is injurious to the credit of a Stato for them to bring out a loan, is absurd and ridiculous. They only bring out loans in which they believe; and tho fact of their bringing out a loan gives it a reputation quite beyond anything in the power of Sir P. G. Julyan and Mr. Sargeaunt. People subscribe to Messrs,

Rothschild and Sons' loans because that house brings them out. I am not aware that they adopt a similar course Decause of the Crown agents issuing loans. Those gentlemen are regarded as eminently respectable; but they have nothing like the money power, or the reputation for commercial sagacity, that belongs to Messrs. Rothschild and Sons. I do not believe that a syndicate, without Messrs. Rothschild and Sons, would have taken up more than £2,000,000, or at more than 90 : nor that the public, without a syndicate or Messrs. Rothschild and Sons, would have taken up anything like that amount. There are two circumstances in this matter to which you will no doubt attach much weight. I allude first, to the fact I have incidentally mentioned, that though Mr. I'eathcrston informed me the letter was not signei. a copy was sent me by Sir P. G. Julyan, in which Mr. Featherston's usual signature was inserted between those of Sir P. G. Julyan and Mr. Sargeaunt. To say the least, this betrays an alarming laxity in dealing with a signature so important as that of the Agent-General. The second circumstance is, that though I am one of the agents, the other three agents, without inviting me to attend, prepared or approved, in what I may call secret conclave, a report for submission to me ; and also decided upon a letter for their separate signature. This was done behind my back : though it is not too much to say that to me is duo the successful negotiation of the loan. .... I proceed to report to you on the sale of the four millions, reserving for possibly a future occasion further remarks on the course adopted by the other agents. , I forward you a copy of the contract entered into with Messrs. Rothschild and Sons. The large amount of the loan, and the condition of New Zealand securities in the money market, caused me to think it desirable that such an arrangement should be made. I believe that, when all the circumstances are considered, the result should be regarded as exceedingly satisfactory, and as one which only Messrs. Rothschild and Sons' immense influence could have achieved. Those gentlemen authorise me to say —a quote their mitten words)—"The whole loan for four millions was more than fully applied for. We could have given the whole loan away, and not havo , kept sixpence ourselves. We have made 1700 allotments, and never had a better list of subscribers. Several banks and insurance companies subscribed largely, and we have every reason to think that they will hold the stock as an investment." Necessarily, the arrangements with Messrs. Rothschild and Sons were not in accordance with the interests of those who have been accustomed to deal with colonial securities. Consequently, some amount of opposition to the loan has been shown ; but that was a contingency with which Messrs. Rothschild and Sons had to deal. . The price at which the loan was issued was nominally £94. The instalments spread over a period, in such a manner as to equal 1 per cent., making the price to the public £93. The commission which Messrs. Roths child and Sons received was 2 per cent., so that the net returns to the Government will be £9l. You will observe, from the terms of the contract that for the commission of 2 per cent. Messrs. Rothschild and Sons guaranteed the sale of the whole loan —three millions at once, and one million within twelve months. Immediately after the applications had been received, Messrs. Rothschild and Sons notified that the whole loan was disposed of. It will no doubt be interesting to the Government to compare the return obtained for this loan with those of former loans, and also to know the actual rate per cent, per annum at which money has now been borrowed. The £9l per £IOO to be received on a 4J per cent. loan, redeemable at thirty years, is tantamount to borrowing at £5 3s. per cent., including the annual percentage necessary to represent the difference between the price realized and par, which will havo to be given when the loan is paid off in full. The first New Zealand loan bearing 4J per cent, interest was negotiated in January, 1574. It was for £500,000, and was offered at a stated rate of £9B. £389,500 was at once sold. The balance, £130,500, had to be disposed of at an additional allowance of J per cent. In comparing this loan, and the others which will be mentioned, with the one negotiated by Messrs. Rothschild and Sons, it will be necessary to remember that the commission to Sir P. G. Julyan and Mr. Sargeaunt was i per cent., and that an additional J per cent, was allowed for brokerage, so that, of the £500,000, £309,500 netted £93, less J percent.; and £130,500 netted £9B, less } per cent. I take the commissions stated above from what I understand to have been the rates charged. But in one of the documents sent me by Sir P. G. Julyan and Mr. Sargeaunt, I observe that £97 4s. 2d. is stated as the net price, so that larger concessions or allowances must have been made than appear in the documents before me. I state this, not by way of complaint, but to explain a possible inaccuracy on my part. ! The next amount offered at 4} per cent, was £1,500,000, in May last. The nominal price of issue was £9B; but, taking into account the dates of the instalments, there was accrued interest equal to £1 lis. ld.-per cent, to be added to the i per cent, for commission and brokerage, so that the price at which the loan was offered amounted to £95 18s. lid. per cent. On these terms £073,400 was applied for. The balance, £820,000, was sold to an association or syndicate, at a considerable reduction —namely, 1 per cent, extra for commission, besides the £ per cent, for the usual brokerage and the commission before mentioned, and an allowance for interest, by extending the payment of the instalments, equal to £ll9s. 4d. The balance, therefore, realised only £94 10s. Bd. It will be seen, then, that of the January loan of £500,000, £369,000 applied for renlised. £97 10s.; whilst the balance, £130,500, realised £97 ss, That of the May loan, of £1,500,000, £073,400 applied for realised £95 18s. lid. ; whilst for the balance, £826,600, only £94 10s. Bd. was obtained. And that the recent loan of £4,000,000 realised £9l. It is instructive to observe the manner in which the previous loans had to be sold at reduced rates, after applications had been invited from tho public. The £1,600,000 offered in May last went off with great difliculty, and was to a large extent only sold through the making of an extra concession beyond what had been publicly advertised. The Bame course, though to a less extent, had to be adopted with the loan in January, 1874. As to these additional concessions. I desire to point out that, although thesagents found it necessary to make them, in order to'effect a sale, they must have felt that such a course was exceedingly distasteful, on account of the dissatisfaction any such proceeding is calculated to create in the minds of those who, having responded to the advertisement—which they suppose tells them the real price at which a loan is disposed of—find afterwards that much of it lias been sold by tho Government at a rate lower than that which bad been advertised. So much was this felt to be the caso with the May loan, that applications have been made by buyers of the first portion of it for a concession in the shape of a reduction of price. In the present instance, no objection can bo made on that score. The loan was offered to the public at a stated rate. As far as the agents were concerned, Messrs. Rothschild and Sons were to receive a stated commission—one that could not be considered excessive, seeing that they were to guarantee the salo of the whole £4,000,000. In the present instance, too, the whole loan was at once disposed of-a result which has not recently been the case with colonial loans. I may, in conclusion, express the hope that it will be some time before it will be necessary for tho Government again to have recourse to tho money market; and that, by that time, New Zealand securities will have very much increased in value. On the 19th March, 1875, the Crown Agents write to Dr. Pollen in order to justify the course they have pursued. It had been necessary for them to be guided as to the period within which the loan was to be raised, and whether it should be by a single transaction or by instalments, by the directions verbally conveyed to them by Sir Julius Vogel; On his assurance that it was essential that the money should be raised with the expedition specified in the contract, they were induced, very much against their inclinations, to acquiesce in an arrangement which, in their opinion, only the most urgent necessity could justify. The system of raising loans through the agency of financial contractors, they said, was frequently resorted to by such foreign states as have already anticipated their resources, or have not sufficiently assured credit in the English market to render it prudent for them to embark in large undertakings without a certainty that the capital required will accrue in instalments as the works progress; but this method of prospectively insuring the receipt, upon necessarily onerous terms, of sucli money as is needed had not hitherto, they believed, been resorted to by Colonial Governments, and they regretted that in this instance New Zealand should have had to follow such a course. And they believed that the mere fact that it has abandoned the Government department would havo a prejudicial effect. Such changes, in their opinion, invariably produce unfavourable influences on public credit, and, unless for some very imperative reason, should, they thought, be carefully avoided. The further correspondence in regard to raising this loan discloses no new facts. DEPOSIT "WITH THE BANK OF NEW ZEALAND. Sir Julius Vogel, on the 10th March, 1875, wrote to the manager of the Bank of New Zealand, to say that the largeness of the amount of the loan lately deposited, together with the fact that a considerable sum would probably be kept with the bank for more than the usual temporary period, led Sir Julius to hope that the manager would see his way to offering some more favorable terms for the deposit than he had hitherto given. In reply to this, the manager wrote, offering three propositions, the third being, that the bank would allow the Government j per cent, instead of 1 per cent, below the bank rate for tho time being on the sum of .£1,500,000, to bo fixed in equal sums for six and twelve months respectively, and that tho balance should remain subject to the present arrangement of 1 per cent, under bank rate, rising and falling therewith, subject to withdrawal to meet the financial requirements of the Government, of which reasonable notice was to bo given. Mr. Vogel replied : " The third proposition I will entertain, if you will bo modify it as to make it apply to all the Government balances of the loan in your hands during the year ending, say, sth April, 1870. I cannot undertake positively to fix with your bank £1,500,000 for six

and twelve months as proposed ; but the proceeds of the loan will only be withdrawn from you to meet the purposes for which the loan is applicable ; and your average balance during the ensuing year will certainly be not less than that which your letter points to—namely, £1,500,000 during the first six months, and half that amount during the next six months." And this modification was agreed to by the bank authorities. THE CIIOWN AGENTS DESIRE TO DISTRIBUTE THE SUM BETWEEN OTHER BANKS. The loan agents wrote to Sir Julius Vogel on the 20th April, 1875, under the warrant of their appointment: — In consequence of the purchasers of the recent £4,000,000 loan having paid up, under discount, tho instalments in anticipation of the due date, the amount at present standing to the credit of the New Zealand public account at the Bank of New Zoa.aud is £2,228.482. . .. . , . We have arxiously considered the propriety of keeping so large on amount at any on« bank, and by way of precaution we propose, acting under the powers vested in us by Governor's warrant of the ISHi day of January, 1873, to divide the amount, by placing portions of it on deposit with some of tho large joint-stock banks, such as the London and Westminster and London Joint Stock. Before doing so, however, we desire to take advantage of your presence in this country, by requesting you to be so good as to inform us whether you see any objection to tho course we propose. A copy of the warrant and of the letter which accompanied it, is herewith enclosed. To this Sir Julius replied on April 29 : I have to say that the warrant and the letter accompanying it, of which you forward me a copy, were meant to give vou power to remove the Government funds deposited with the Bank of New Zealand, in case yon were of opinion that that bank was getting into difficulties, and that the documents were not intended to bo otherwise acted upon. The Government are under an agreement with the Bank of New Zealand, and six months' notice is necessary in order to end it. At the same time, theie are frequent negotiations for modifications of the terms of the agreement. In 1872, you addressed the Government upon the question of keeping such large balances with the Bank of New Zealand, and the reply was, that you might be at liberty to invest some portion of the Government funds in Exchequer bills, if you thought it desirable to do so; but that the balance was to be kept at the Bank of New Zealand. Subsequently, legislation took place, with the view, as I have said, of enabling the representatives of the colony in England to take action in case of difficulty arising. So little, however, did I contemplate the present necessity of moving the balances, or any portion of them, from the Bank of New Zealand, that, as Colonial Treasurer, I lately negotiated with the bank for increasing tho rate of interest; and it wae only after I had informed the Agent-General of the result of those negotiations—namely, a concession of } per cent.—that I was informed that you proposed to disturb the balances. You now ask my opinion upon the subject. I reply, that if you were to adopt the course you propose, you would upset an arrangement which, as Colonial Treasurer, I had made. lam quite unaware of any good reason for withdrawing part of the account, as proposed by you. The interests of the Bank of New Zealand are intimately bound up with tho interests of the colony ; and I do not see why we should enter into relations with other banks. It is true that the balance is at present a very large one. But it will shortly be much reduced. In the colony it will bo largely drawn against, and the bills purchased by the Bank of New Zealand; so that, in reality, the bank will be giving to the Government, in the colony, a very considerable sum, which nominally remains on deposit with the bank, and bearing interest here. I do not think that, upon the whole, the responsibilities of the Bank of New Zealand to the Government are in excess of the general responsibilities of tho Bank of New South Wales to the Government of New South Wales ; and, unless you have weighty reasons for doing so, I cannot conceive a course more prejudicial to the interests of the colony than that of throwing discrodit upon tho principal local bank. With a view to this question being well considered by the Government, I am willing to take upon myself the responsibility of intruding you not to act as you have proposed, except upon further instructions from tho colony. On this question a case, as prepared by Messrs. Mackrell and Co., was submitted to Mr. Joseph Brown, Q. 0., who delivered the following opinion : I think the nominees in the warrant (whom I will term F. J. and S ), having accepted it and acted on it, come under an obligation to appoint a bank or banks for the purposes mentioned. I am of opinion that the warrant was an authority to appoint a bank from time to time, and to change it as they saw fit; but that the letter accompanying the wan-ant fully authorised F. J. and S. to appoint the A. B. C. bank, and freed them from responsibility for that selection and for its continuance—leaving, however, to them the duty of removing the account should it become expedient to do so from any change of circumstances affecting the bank. I am of opinion that F. J. and S. will be practically free from liability arising from any arrangement entered into by the Colonial Treasury with the bank —the Treasury standing really in the place of the Governor for this purpose—and the Governor being the principal of F. J. and S., who can revoke their authority at any time. It is plain that the Colonial Treasury have made some arrangement with tho A. B. C. bank (Minute of August 2,1873), and what the Colonial Treasurer has done in England seems to be only an improvement or modification of that arrangement; and I think F. J. and S. must not attempt to disturb it. I am of opinion that they are in no way liable for anything which the Colonial Treasury or Secretary have dono with the bank, nor bound to exercise any discretion which will interfere witli those arrangements, and, if they did so, after knowing that sucli arrangements had the sanction of tho Colonial Treasury or the Governor, I am inclined to think they would be responsible for any loss of interest or damage arising therefrom. This is answered above. The Governor can revoke tho warrant at any time. I am of opinion that lie can also contract the exorcise of the power given by it, by directions accompanying the warrant, or by interfering through his Government in the selection of tho bank, and by making arrangements with them. I think that all which P. J. and S. are callod upon to do is, to write to the Government calling their attention to the warrant of January 18,1873, and tho letter accompanying the same, to the minute of August 2, 1873, and to the arrangements made by the Colonial Secretary here with the bank, and pointing out tiiat these arrangements by the Government with the bank relievo F. J. and S. from all responsibility for the continuance of tho Government account with the bank as well as for the large amount of money in its hands, reminding the Government of tho letter of June 8, 1872, on occasion ot tho former loan, and asking their instructions as to whether F. J. and S. are still to undertake tho responsibility of removing the account from the bank in the event of any emergency arising which may render it oxpedient to act before tho Colonial Government can be communicated with. As thcro is no pressing danger, nor likely to be for a good while to come, I think nothing more than this is required to dellne the position of F. J. and S., and free them from responsibility.

aa follow, viz.: — £ s. d. Price realised on £500,000 4} per cents sold in January, 1874. after deducting commission and brokerage 97 4 2 Price realised on £1.500,000 4} per cents sold in May, 1874, after deducting commission and brokerage 95 4 2 Price realised on £4,000.000 at 4i per cent, sold in March, 1875, after deducting commission and brokerage 91 0 0 On the first of these loans a charge of £2 15s. lOd. per cent, on the whole amount will fall on the Government 13,958 0 0 On the second, £415s. lOd. per cent. 71,875 0 0 On the third, £9 per cent. 360,000 0 0