PUBLIC RECORD OFFICE
Reference :-
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C.O. 882
338
2. When we agreed in July last to provide temporarily and in anticipation of the issue of a loan the sum of £1,100,000, which the Colonial Government desired to lend to the Viceroy at Wuchang, we had anticipated that we should be provided by the beginning of the present year at the latest with the necessary legislation to enable the loan to be issued. We had also contemplated that the loan would take the shape of short-dated debentures, and we are still of opinion that such an issue would have been most in accordance with the interests of the Colony, as it would have enabled the money borrowed to be paid off as the repayments to be made by the Viceroy under the terms of the agreement with him come into the possession of the Colonial Government. Unfortunately, however, the legislation which has been passed in the Colony has not been sufficiently specific to enable such an issue to be made, and time has not permitted of reference being again made to the Colony to procure the passing of the legislation which we had contemplated in the first
instance.
3. I would here, explain that the money which we have temporarily lent to the Colonial Government is in course of being required for other purposes, and will all be required not later than the beginning of May, and we ascertained from our bankers that in view of the stringency which at present exists in the money market, they hoped that we would keep our requirements for temporary advances within the lowest possible limits. Our brokers had also warned us that many fresh issues of loans are impending, and that unless we acted with promptitude we might find that we were anticipated by other issues, and that the Hong Kong Loan might in consequence have to be postponed indefinitely.
4. In these circumstances it became necessary to consider whether the loan should not be raised in the shape of Stock, as prescribed by the provisions of the Ordinance No. 11 of 1905, and, further, whether the issue could be made on such conditions as would not be likely to prove very disadvantageous to the Colony in the event of the Chinese Viceroy exercising the option which is given to him in the agreement of repaying at the end of five years the whole of the advances made to him which might then be outstanding
5. Most fortunately in connection with the previous loan of the Colony the power exists to pay off the loan in April, 1918, and this date is only 24 years after the expiration of the period at which the completion of the repayment of the advance made to the Chinese Viceroy is in any circumstances to be completed. It appeared to us, therefore, that by issuing the new loan as an addition to the existing line of Stock, and by subsequently making use of the power of paying off the loan to which I have referred, the risks of the Colony and the period within which its debt would be unnecessarily inflated could be brought within comparatively narrow limits, and that this could be effected by the further arrangement which I now proceed to explain.
6. We
that the whole of the monies received from the Chinese Viceroy propose on account of his debt to the Colony, whether in respect of interest or repayment of capital, shall be remitted to us from the Colony and be paid into a special fund to be under our control, and that this fund shall be administered in the following
manner :-
(1) The payment of the interest required for the Stock raised to provide
the £1,100,000 to be the first charge on the fund.
(2) The monies required for building the Colonial section of the Kowloon- Canton Railway, estimated to cost £500,000, to be provided out of the fund, the Colony paying into the fund interest at the rate of its public debt on the amount of all advances so made.
(3) All further monies remaining in the fund, including the interest earned on loaning out monies in the fund to be considered as being earmarked towards paying off the debt created to provide the £1,100,000.
7. If this proposal is carried into effect we estimate that there should be in the fund in April, 1918, a sum of about £700,000 which could be applied towards liquidating the Stock created to provide the £1,100,000, and this sum, together with the further sum of about £100,000 which will have accrued in the Sinking Fund for the previous issue of Stock would enable the debt of the Colony to be reduced in 1918 from about £1,500,000 to about £700,000 by means of a conversion operation or by the issue of a new loan, as the circumstances of the case may prove to be desirable when the time arrives.
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8. Having thus explained the grounds on which we arrived at the conclusion that the new loan must be issued in the shape of Stock: that it must be issued at once and that it would be desirable to issue it as an addition to the existing line of Stock, I now proceed to report the actual action taken in the matter. I enclose herewith twelve copies of the prospectus which we issued on the 14th instant inviting tenders for the loan to be sent in on the 20th instant. I also enclose a schedule of the tenders received, which will show that the loan has been fully covered and that Stock to the extent of £1,142,500 has been allotted, which we estimate will provide approximately the sum of £1,100,000, together with the expenses of issue. The schedule also shows that the average price realised for the loan has been £99 is. per cent.
9. The expenses of the issue, full details of which will be subsequently given in the loan accounts which we shall furnish to the Colony monthly, may be taken to he approximately as follows, viz. :—
per cent. commission to the Crown Agents for their services in issuing the loan, out of which per cent. is payable by them on all tenders received through members of the Stock Exchange or from bankers or the principal financial houses.
1 per cent. underwriting commission to the members of the Stock Exchange and to the financial houses who guaranteed that the loan should be placed at 99 per cent. per cent. commission to our brokers for securing subscriptions to the
underwriting arrangement.
per cent. (rather less) approximately for miscellaneous expenses, ie., printing, advertising, stamp duty and legal charges for preparing the declaration required in the case of an issue of Stock under the provi- sions of the Colonial Stock Act.
The total expenses to the Colony may therefore be taken approximately as £2 10s. per cent.+ 9s. Ed. per cent. for the value of deferred payments, which means that the Colony will receive about £96 1s. 4d. per cent. for its loan, and that it will have to pay £3 12s. 10d. per cent. for the use of the money + £1 0s. 10d. per cent. further five years hence, when the Sinking Fund under the Ordinance No. 11 of 1905 is fixed to commence.
10. I would here explain that since the great change which has come over the Stock Exchange and the money market since the war in South Africa, it has become practically impossible to place loans bearing a comparatively low rate of interest without first underwriting them, and no underwriting is effected on lower terms than those arranged in the case of the Hong Kong Loan. The position of affairs is, in our opinion, most unsatisfactory, but we have no power to fight against the system, as the Stock Exchange have it in their power to kill any issue by leaving it severely alone. In this instance, however, the underwriting has been fully earned, as a reference to the schedule of tenders which is sent with this letter shows that the loan was taken up by the public to the extent of only £366,200, and that the balance, £776,300, or about 68 per cent., has had to be taken by the underwriter under the conditions of the underwriting arrangement.
11. Whether the loan is to be regarded as a success or as a failure will depend upon the point of view from which the matter is looked at. From the point of view of the underwriters the loan is, of course, regarded as a comparative failure, as they will be required to lock up part of their resources until they can pass on their holdings of the loan to other hands. For their risks they are, however, paid by the 1 per cent. which they receive as underwriting commission, a portion of which they can well afford to share with the public. Their only grievance in the matter is, therefore, that they have not made in the first instance so much out of the business as they hoped to do. From the point of view of the Colony the issue may, however, be considered to be a decided success. The existing Stock was standing at a nominal price of 100 to 102, but there was no Stock on the market, and there was £1 38. 4d. accrued interest in the price. The net price was, therefore, about £98 16s. 8d. per cent. The Colony, on the other hand, has placed its loan at a price of £99 1s., less expenses, or, allowing for the value of deferred payments, at the rate of £98 11s. 4d., and will pay at the rate of £3 12s. 10d. per cent. for the money which it has lent to the Chinese Viceroy at 4 per cent.
12. While, however, we consider that an excellent bargain has been made for the Colony and that the Colonial Government should be well satisfied with the
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PUBLIC RECORD OFFICE, LONDON
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PUBLIC RECORD OFFICE, LONDON
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price it has obtained for its loan, we ourselves are a good deal disappointed with the general result of the issue. When the loan was underwritten it was received with much favour, and there was every prospect that the issue would be a great success, both from the point of view of the Colonial Government and from that of the underwriters. Unfortunately, however, before the tenders were received a great change came over the Stock market, caused by the general state of nervousness which has arisen in connection with the Conference at Algeciras, and the state of uncertainty which exists as to the political future of South Africa. As a conse- quence many people who in ordinary circumstances would have sent in tenders for the loan held themselves aloof, and the loan became very much the affair of the underwriters and those they could immediately influence. I enclose, for the in- formation of the Colonial Government, a copy of the "Times"
money article of the 21st instant, from which it will be seen that the comparative failure of the loan has been attributed to the fact that the loan was issued as a tender loan and not in the shape of a subscription or fixed-price loan. Upon this I would remark that the issuers of Government Loans are always placed upon the horns of a dilemma when fixing the conditions of an issue. On the one hand they are told by the newspapers when a loan is issued at a fixed price and is subscribed many times over that they have fixed the price too low and therefore given their principals away. On the other hand they are told in the case of a tender loan which fails to go that they ought to have known better and to have issued at a subscription price, the fact being ignored that it is the interest of the Government on whose behalf the loan is issued that ought to be the governing factor in settling the terms of issue, and that the interest of the Stock Exchange can only be regarded as being of quite secondary importance.
13. For the above reasons the issuers of loans on behalf of the Government of this country and of India make it almost the invariable practice, except in the case of loans of the very largest amounts, to issue loans by tender instead of at a fixed price, feeling doubtless, as we do, that it is better that they should be subjected to the ignorant and often interested criticisms of the newspapers and of the Stock Exchange rather than lay themselves open to the charge of having sacrificed the interests of the Government which had been entrusted to them by making an issue at too low a price.
14. I would add, as showing that the remarks which I have made are of a practical and not merely of a theoretical nature, that when in the middle of the war in South Africa we found ourselves under the necessity of raising a loan on behalf of the Government of Ceylon at a fixed price, owing to the refusal of the Stock Exchange to have anything to do with a tender loan in the then existing circumstances, the loan, owing to a sudden improvement in the monetary and political position, proved such a success that it was subscribed several times over, and we were subjected to the charge of having given away the interests of the Colony. Subsequently the loan dropped to a considerable discount on the issue price and remained below that price for a long period of time, but the criticisms made upon us had had their effect and had given the Colonial Government the impression that they had not been well served in the matter.
15.
Of course, the object to be arrived at in all loan issues is to obtain the happy mean, i.e., that the loan shall go, but shall not be so rushed as to throw discredit on the judgment of the issuers. In order, however, to secure this object the issuers of loans must be infallible.
What
16. I would add, with reference to the remark in the" Times" money article, that the real investor" does not understand the tender system, that this is quite real investor is quite a correct. It should, however, have been added that negligible quantity in connection with all loan issues, and that such issues are almost entirely taken up by the Stock Exchange and by the financial houses. happens is that when it becomes generally known that a loan is going to be a success the so-called public, which is almost exclusively composed of small people and clerks--so-called stags or premium hunters--who form the fringe of the Stock Exchange and city business, rush in vast numbers of subscriptions of small amount in respect of which they hope to get allotments which they at once sell to capture the premium which usually exists in connection with a successful issue, it being unfortunately practically impossible, in making allotment of an over-subscribed loan to distinguish the "real investor" from the applicants who are merely trying to capture a premium.
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17. I would add that the "Stock Exchange List" of yesterday's date shows that there was a transaction yesterday in the existing Hong Kong 34 per cent. Stock at the price of £100 per cent. From which, however, should be deducted the amount of accrued interest, ie., £1 3s. 4d. per cent., bringing down the net price of the Stock to £98 18s. 8d. per cent. On the other hand transactions in the new £1 issue took place yesterday at to discount on the issue price of 99 per cent., showing, therefore, that for wholesale operations the new Stock is valued at from £98 7s. Od. to £98 10s. per cent. It will be seen, therefore, that the underwriters and the newspapers have very little ground for their complaints as to the conditions under which the new issues have been made, and that their criticisms amount therefore to little more than, as I have previously said, that they have failed to make in the first instance as much profit out of the transaction as they hoped to do.
18. This letter is, of course, written for the confidential information of the Colonial Government and should not be published, but there is no reason why the Government should not make use of the facts and arguments which we have adduced if the conditions of the issue should be challenged.
The Honourable
The Colonial Secretary,
&c.,
&c., Hong Kong.
&c.,
“TIMES," 21st February, 1906.
THE HONG Kong Loan.
I have, &c.,
E. E. BLAKE.
It is officially announced that "tenders for the Hong Kong Government Three-and-a-half per Cent. loan were opened to-day at the office of the Crown Agents for the Colonies. The loan was fully covered, the prices varying from the minimum of £99 to £100." The correctness of this statement is not, of course, in any way inconsistent with the fact that the underwriters of the issue have had to take up nearly 70 per cent. of it. This result is unfortunate, and seems to demonstrate that it was a mistake to offer the loan by tender. Issues by tender can only be successful when lenders are exceptionally eager, and in the opinion of many investment brokers, are always to be deprecated, since the real investor cannot understand them and is never attracted by them.
6675
No. 223.
GOVERNOR SIR M. NATHAN to THE EARL OF ELGIN.
(Received February 24, 1906.)
(Secret.) MY LORD,
Government House, Hong Kong, January 24, 1906. IN continuation of my secret despatch of the 11th instant, on the subject of negotiations for the completion of a Loan Agreement and Joint Working Agreement in connection with the proposed Canton-Kowloon Railway, I have the honour to enclose, for your Lordship's information, copies of the protest made (in accordance with the suggestion contained in Sir Ernest Satow's telegram of the 11th January), on the 12th January by Messrs. Jardine, Matheson, and Company against the Viceroy's refusal to negotiate, and of a letter written to me by that firm on the same date commenting on the Viceroy's despatch to the Consul-General of 30th December, of which a copy, as well as one of the telegrams above referred to (III.), went to your Lordship in my despatch of the 11th. I communicated this letter on the 15th to the Consul-General for his information, and for such action as he might think fit. A copy of his reply of the 17th is annexed.
2. On the 19th of January I received a letter from the Consul-General, dated the previous day, of which the enclosure embodied a suggestion of the Viceroy to negotiate on the lines of the Northern Railways Loan Agreement of 1898. As it was not clear from the last sentence of this letter whether the Viceroy wished my assistance in obtaining copies of the texts of this Agreement or in negotiating on its lines, I telegraphed to Mr. Scott to clear up this point. In reply he wrote to me privately that my assistance to obtain copies of the texts of the Agreement had been
• No. 211.