Finance
Conversions and the Investor
DURING the coming year a good many investors who are also payers of Income Tax will experience some relief through the payment under Schedule D at the rate of 4s. 6d. instead of 5s. It is a relief which is certainly much needed, for in one way and another the holder of investment stocks has suffered severely in the matter of income. So far as capital value is concerned, there has, of course, been an actual appreciation, but unfortunately it is impossible under present conditions to make this appreciation applicable to income requirements.
If, for example, we recall the experience of holders of the old 5 per cent. War Loan, we find that the conver- sion into 3f per cents, has meant a saving to the Ex- chequer, but a loss in income to the holders of the Loan of an annual amount of about £30,000,000. It is true that in spite of this reduction from 5 to 3f per cent. the price of the new Loan stands as high as, or higher than, the old 5 per cent. Loan, but if the holder of the new Loan were to sell at the present price of 105 he would find it impossible to acquire another Government stock giving as high a rate of interest. A still more striking example might be found in the case of holders of the existing 5 per cent. Conversion Loan, the earliest date of redemp- tion of which is 1944. In this case the Stock has risen to close upon 120, so that those who acquired the Stock at par have a present profit in capital value of something like 20 per cent. Yet if the Stock were sold and the proceeds reinvested in long-dated Government issues, the yield, even allowing for the addition to the capital, would probably only work out at about 31 per cent.
CONVERSION OPERATIONS.
It is not only, however, in the matter of the old 5 per cent. War Loan that investors have suffered some losses in income during recent years. Apart altogether from those instances where holders of foreign loans haVe had their income diminished by whole or partial default on the part of the borrowers, and setting aside also the case of the many unfortunate holders of Home Railway Ordinary stocks who have received no dividends at all for some years, investors in Colonial Loans, -Corporation issues and some other trustee securities are now having to -face constant conversion operations under which they have to submit to repayment at par or to exchange into a security giving a much lower rate of interest.
During the last two years the Commonwealth of Aus- tralia has—very properly—taken advantage of present monetary conditions and high prices for gilt-edged secu- rities to convert something like £100,000,000 of debt due to investors in this country, and once again investors have suffered in income, while the National Exchequer of Australia has benefited. Unfortunately, too—from the investor's point of view—there seems to be every probability of the present monetary ease continuing and, as a consequence, of many other conversion operations.
RUMOURED FURTHER CONVERSIONS.
In another column I refer to the fact that Nigeria, although having to deal with a Loan paying only 3f per cent., has thought well to exercise the option of redeeming it so as to issue a corresponding amount in 3 per cents. Moreover, conjectures are already rife as to possible further conversions of British Government Loans. In the case of the 2 per cent. and 8 per cent. Treasury Bonds, any idea of conversion would presumably be prompted more by a desire to curtail the amount out- standing of short-dated obligations than to effect a saving in interest charges, but, even so, by reason of the height at which long-dated Government Loans now stand there is little doubt that the Government would be able to convert on terms thoroughly satisfactory to the borrower. Rumours, however, are not concerned merely with the Government's short-dated obligations, for in one or two quarters the suggestion is now being put forward that it might • be profitable to the Government to make some offer of conversion to holders of the (Continued on page 410.) • -Finance .• (Continued from page 414.) 5 and 41 per cent. Conversion Loans. In these two cases the moment has not arrived, of Course, when the Treasury has the right of compulsory redemption, the earliest date in the case of the 5 per cent. issue being 1944 and in the case of the 41' per "cents.' 1'940. Never- theless, it has be m suggested—and the point was discussed recently in the columns of the Morning Post— that as regards the 5 per cent. Stock the Government might find that if a fairly long-dated 21 per cent. Stock were offered on terms giving holders £120 of such Stock for £100 of Conversion Fives, the response might be a good one, for the offer would be the equivalent of giving them 3 per cent. on their present nominal capital without loss of present capital value. And, similarly, it is suggested that holders of the 41 per cent. Conversion Loan might receive an offer to exchange into a long-dated 21 per cent. issue on the basis of obtaining £110 of 2i per cent. Stock for every £100 of Conversion 44 per cents.
THE EXCHEQUER'S STANDPOINT.
From the standpoint of the Exchequer it is easy to see that some further saving in Debt Service might be secured by an operation along these lines, though, of course, by reason of the terms of exchange there would be an addition to the actual total of the National Debt. Whether the final result would be advantageous to the Government must depend, of course, upon develop- ments during the next few years. If the present ease in money is to continue for some few years to come it might be more profitable for the Treasury to refrain from converting at the present time, but if there is to be some material change within the next six or ten ,-ears then it might be that advantage should be taken of the present abnormal ease.
THE STANDPOINT OF THE INVESTOR.
' Inasmuch, however, as the Treasury experts are far better able than the public or the writer of this article to forecast-the future-of -Money' rates, it In -the standpoint of the investor with which I am concerned at the moment. Whether there is foundation for the rumour of a possible offer of conversion to-holders of the 5 pet'. cent. Conversion Loan I am quite unable to say, but assuming for the moment that such an offer were to be made, what should be the attitude of the holder of the existing 5 per cent. ? Ott the one hand he is sure of a. continuous 5 per cent. until 1944, and even at that time of being in no worse position than having the whole of his original capital' returned to him, that is if he was an original holder at par. On the other hand, as the year of redemption draws near, the holder must expect to see the market price of his Bonds steadily decline, and the question is, whether he would be well advised to consolidate his 20 per cent. of capital appreciation by accepting;—if it were made— any such offer as that outlined above. . Indeed, the question is one which arises quite independently of whether the Government does or does 'not elect to make an offer of conversion before 1944, for many holders of these Bonds must, I fancy; already be wondering whether they ought to hold on to the date of maturity or realize at say 120 with the object of reinvesting the money.
• ' • THE SMALL INVESTOR.
• Here, of course, much must depend upon the eircum. • stances of the holder. In the case of a trustee, for example, he would be confronted by the fact that a rein- . vestment of the profits of sale would still give a low yield though he would be freer from the prospect of capital • depreciation. And again, in the case of Financial Institutions and Trust Companies, it - is possible that considerations might apply making the offer of con- version into a long-dated stock acceptable. I have in mind, however, more particularly the case of the private investor to whom the securing of as high an income as may be consistent with reasonable safety is absolutely essential, and in' such cases I think it is very much open to question whether the sale of some portion of the stock commanding 20 per cent. premium might not be desirable, for under expert advice, it should. I think, be possible to obtain say a 4i per cent. yield —allowing for the profit made by the sale of the old stock—accompanied by sufficient security.
As I have frequently mentioned in my articles, it is difficult, if not impossible, to discern at present any change in monetary conditions likely: to affect the course of security values . in the near. future, . and the important point has also to be recognized, that the chief borrowers,' nnmely, the Governments here and in the United States, have it 'in their own power very largely to determine the value of loanable capital. Nevertheless, I cannot subscribe to any idea of the present abnormal ease in money continuing indefinitely. Much of the ease is directly traceable to the absence of the restraining influence of an International Gold Standard, and I do not believe that many more' years. perhaps many more months, can pass without the leading nations reaching the conclusion that a return to some kind of International Gold Standard is essential in the interests of international trade and even to international civilization. While, therefore, it is, of course, impossible to say whether ten years hence the yield on investment stocks will be higher or lower than it is today, I am cer- tainly inclined to consider the former condition as the
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