Finance
Prospectuses
AT the close of my article last week, dealing with the dangers attached to a boom in new capital issues, I said, " it behoves investors therefore to scrutinize with more than ordinary care the Prospectuses brought to their notice." Arising, I suppose out of this article, it has been suggested to me that I should go a little further in the matter and endeavour to explain the kind of study which should be giyen by the investor to the appeals of capital through the medium of the Prospectus. In endeavouring, however, to comply with this sug- gestion I would like to underline the word " investor," for I do not propose to say anything further with regard to those who study a Prospectus with the one idea of seeing whether there is a chance of securing a quick profit from premiums on the scrip after allotment. Indeed, there is a good reason why no time should be wasted 'upon this class of applicant, for they arc usually so intent upon the prospect of premiums as to be quite indifferent to the question of intrinsic merits, and it is intrinsic merits that the genuine investor should have in Mind when studying a Prospectus.
HIGH CLASS ISSUES.
I can, perhaps, best deal with this subject of Pro- spectuses by dividing them into their different classes, and first of all let us consider the question of the Pro- spectus of some first-class trustee security, representing possibly a loan to the British Government, one of our Dominions, or an English Corporation. In all of these it _is unnecessary to study the Prospectus in great detail as regards the security or safety of the loan, though even in these first-class issues, the question of intrinsic merits should have some considera- tion. Moreover; I cannot help thinking that in the case of some of our Dominion Loans, it may be well for the investor, when considering the terms of issue, to make a mental enquiry whether present high prices are en- tirely justified by the security offered by the borrowing country, or whether it is a case of cheapness of money and the consequent rise in British. Government securities having enabled the Dominions to borrow at a rate scarcely consistent with the fact that the margin of risk as compared with British Government Stocks may be somewhat greater than is expressed by the very narrow margin between the price of their securities and the price of British Government Stocks.
CORPORATION ISSUES.
Again, in the case of Home Corporation Stocks, due consideration should be given to the assets behind the loan and the question of whether the rating is abnormally high in the district controlled by the borrower. These particulars are almost always to be found in the Prospectus where the debt of the Corporation will be found set out, probably with a further statement of what proportion of the assets are productive of Revenue, while a further paragraph will usually give the full particulars with regard to the rates and also the rateable value of the Borough or other municipality. Some attention should also be given to the general reputation of the .Corporation for lavish spending or on the other hand, for a prudent conduct of its finances.
DATES OF MATURITY.
A further point which should particularly be noticed by the potential investor in the Prospectus of first-class loans, is the date of maturity. This is a point which is obviously of special importance at the present time. It remains to be seen whether we are at the height of the rise in gilt-edged securities or whether still further advances will take place during the next few years. On the law of averages, however, it is quite clear that high-class borrowers are obtaining their loans on highly favourable terms, and that fact has its important bearing on this question of the dates of redemption. Trustees are, of course, not in favour of loans of too short-dated a character, but on the other hand, the ordinary investor will probably prefer, in times such as the present, to find that the loan is not too long-dated, while a further point which should command his attention, is what is known as optional dates of redemption. In times like the present when all the conditions are favourable to the borrower there is a tendency for these optional dates to be somewhat wide apart. That is to say, a loan may probably be issued where the final date of redemption is, say, 1905, but the optional date may be 1955, which means, of course, that while the loan is irredeemable for 20 years, the borrower will, after 1955, have an option extending over the long period of 10 years to redeem at any time at par, and the point is one which should be watched by the investor.
MONETARY CONSIDERATIONS.
Moreover, this date of redemption is one which should be studied by the careful investor from the standpoint of what may be termed average monetary prospects. We are now living in such a new world and under such different conditions in the matter of central control of monetary policy, from those of the pre-War years, that it may be present conditions of abnormal case are to extend for very many years, in which case, of course, there is a good deal to be said in favour of the long-dated loan, even when issued on such terms as are usual today. Unless, however, world trade stagnation is to be per, manent—which is unthinkable—it seems unlikely that any real revival in trade can fail to have some effect in occasioning a moderate rise in the value of money. And if there were to be a real revival in trade, its effect upon gilt-edged securities might be the more pronounced by reason of the extent to which the joint stock banks in this country have increased their holdings of Govern- ment securities,, through inability to find other profitable use for their funds. Any trade revival, however, which occasioned an increase in the banks' loans and advances might easily lead to realizations of securities, and therefore the investor, when considering the Prospectuses of even first-class loans, may, if he holds this view with regard to a possible change in monetary conditions, prefer to select those issues where the date of maturity is not too far off.
Next week I shall hope to deal with the subject of Prospectuses of Industrial Companies and also with those of the more speculative issues.
ARTIIUR W. KIDDY.
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