Finance
New Loans and the Investor
ONE of the outstanding features of the present financial situation is the considerable activity in the flotation of new loans. Some of these are of the purely invest- ment character in the shape of trustee stocks, mostly offered by Home Corporations, but there is also a great deal of activity in issues of Preference and Ordinary shares by leading Industrial companies at home, with special activity in the flotation of shares by Aircraft companies, and from time to time quite a fair number of new Mining ventures are put forward. Such, however, is the abun- dance of unused money at the present time—it is doubt- ful whether banking deposits were ever higher than just now—that the investor is not getting very much oppor- tunity of obtaining materially higher yields for the employment of his resources.
RECENT FLOTATIONS.
I am glad, however, to note that some of the trustee issues have been offered on terms somewhat more accept- able to the investor than was the case a few months ago. A week or two ago new loan flotations of the trustee type were resumed; the first were those of Manchester, Cardiff and Birkenhead, all of which made issues in the form of 3 per cents. offered at the price of 99, and to all of them there has been a good response from the investor.
A CRITICISM.
I notice, however, that these terms have been sharply criticized by the official organ of the Labour Party on the grounds that much better terms could have been obtained. This criticism, however, seems entirely to overlook the actual experiences of the early part of the present year. At that time a number of issues was being made on terms which gave the investor a yield of even less than 3 per cent., and the result was that the investor failed to respond ; indeed, so large were the amounts of these stocks left in the hands of underwriters that it was necessary to make a complete cessation of all public borrowings by Corporations for some months until these issues had been absorbed or partially absorbed by purchase in the market. Small wonder, then, that counsels of prudence should have prevailed and that the Corporations should have realized that for the placing of fairly long- dated loans the investor is entitled to a yield of at least 3 per cent.
THE SYSTEM OF " CONTROL."
It is probably true that some Corporations have been able to borrow certain amounts for a short period at under 3 per cent., but whether they have acted wisely in borrowing short rather than taking advantage of the present ease in money to issue long-dated loans on terms calculated to ensure a response from the investor remains to be seen. Under the present system of control the Corporation issues do not overlap and every effort is made to secure the best borrowing terms consistent with reasonable certainty of the issues being absorbed by the public. I have little hesitation, however, in saying that, if such control were completely relaxed and the borrowing Corporations were to come as they please and compete as they please, the net result would be far less favourable to the borrower than is the case at the present time.
THREE PER CENT. YIELDS.
Now. however, that the investment resources available, and also the disposition of the investor, have been tested sufficiently by these preliininary issues, it is perhaps only natural that borrowers should once again be asking some- what higher rates, and in the case of an issue by the Leeds Corporation of £4,000,000 in 3 per cent. Stock, the price of issue was raised to 99i. As a consequence, there . was a diminution in the rush of subscriptions, for the simple reason that the " stag " (the premium hunter) was less in evidence, but genuine applications were sufficiently large to cause the Loan to be covered some three or four times, large applicants only receiving about 27 per cent. of the amount applied for, 'While the StocK stands at a small premium. - At the- moment of writing an issue by, the Liverpool Corporation for £3,000,000 in per cents. is expected, and in this case also it looks as if the price of issue would be 99i per cent.
THE INVESTOR'S LIMIT.
I am inclined to think, however, that 994, or at the utmost 100, will mark the limit which the investor is prepared to pay even for a 3 per cent. trustee loab, other than that of the British Government, for white, as I have already said, investment resources are extensive, there is every likelihood of either fresh borrowing or conversion operations being on a large scale in the near future.
FURTHER ISSUES EXPECTED.
Quite apart from a number of other Corporations which are expected to be borrowers shortly, it has to be borne in mind that next month we may see the flotation of the first portion -of the Loan for Railway electrification, with a guarantee as .to principal and interest by the British Treasury. The work of electrifi- cation itself will extend over some five years, and conse- quently the amount of £35,000,000 in loans will doubtless be spread over that period. Still, it will be all new money and will not be without its influence in stimulating business activity generally and increasing purchasing power. Then it should be noted that in October New South Wales 3 per cent. Stock for £12,500,000 will mature, while New Zealand has outstanding £10,000,000 in 5 per cent. Stock which can be redeemed at any time on giving three months' notice. In both of these direc- tions, therefore, conversion operations may be expected, and while, on the one hand, the flotations will be assisted by a continuation of control as regards new issues of the Trustee type, those responsible for the flotations may well learn a lesson from the events during ,the first few months of this year when undue advantage was taken of easy monetary conditions to float loans on terms not giving- sufficient consideration to the require- ments of the investor. It is one thing for genuine borrowers, whether Corporations or Industrial concerns, not to be hampered by unduly high money rates, but it is another thing for interest rates to be so low as to stimulate municipal expenditure beyond its proper limits, with disastrous results to the ratepayers, who, for the most part, are also the investors who have to
Previous page
