416
4. But if any considerable amount of the Debentures can be extinguished without the necessity of issuing Stock either in exchange or to provide the funds for extinction, then the saving to the Colony is increased by the disappearance of the interest and Sinking Fund charge, together 7 per cent., on the Debentures extinguished. Acting on this principle we have determined to offer convert only £140,000 of Stock and to provide funds for the extinction of the remaining £60,000 of Debentures, by the appropriation to this purpose of the Sinking Fund accumulations of £58,600 and by the sale of Stock for the small balance.
5. The whole transaction works out as follows on the basis of a 3 per cent. rate for the capitalisation of Savings and the investment of Sinking Funds.
Debenture Debt,
To be redeemed by appropriation of Sinking
Fund accumulation..
Amount to be raised by conversion or sale
.£200,000
58,600
of Stock,
.£141,400
Annual charges on this Stock.
Interest at 3 per cent., ....
Sinking Fund at 1 per cent.,
...£ 4,949 (for 49 years). 1,414 (commencing 2 years hence).
£ 6,363
Annual charges on the Debenture Loan.
Interest at 4 per cent.,................
Sinking Fund,.....
£8,000 (for 13 years).
7,072
£15,072
The savings cffected by the operation will be-
(a) Saving of £3,051 (£8,000-£4,949) a year for 13 years,
capitalised at 3 %,..
.£47,650
(b) Saving of Debenture Sinking Fund Contribution of £7,072
a year for 2 years, accumulating for 11 years at 3 %,... 19,872 (e) Saving as between Stock and Debentures Sinking Fund contribution, £5,658 a year (£7,072–£1,414) for 11 years, capitalised at 3 %,
.....
Total Saving at end of 13 years,
72,466
.£139,988
But the charges on the £141,400 of 34 per cent. Stock created under this operation will have to be met for 36 years after these 13 years, and these charges may be provided for by the purchase, out of the above saving, of a 3 per cent. Annuity for 36 years, which will absorb £138,919, leaving £1,069 as the net saving to the Colony.
6. There is, however, another element of economy in this operation. The Sinking Fund of the Debentures must be invested at 3 per cent. in order to extinguish the debt at the end of 13 years from now, the date fixed for its redemp- tion. But this is not possible. The investments hitherto made are yielding only £3. 6. 2 per cent. and, looking to the increasing difficulty of maintaining the yield of Trust investments, the interest that can be expected is that the average yield of the Sinking Fund investments of the Debentures would, if the currency continued to the redemption date, be 3 per cent. This would result in a deficiency of £5,066 which the Colony would have to provide for 13 years hence. The con- version and redemption relieve the Colony from this liability and this amount of £5,066 may consequently, with complete fairness, be added to the £1,069 already credited to the transaction, inaking a total saving of £6,135.
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