Evening star., 1932-08-21
WAIVER ON SINKING
FUNDS SUGGESTED
Moratorium Might Enable
Foreign Borrowers to Con.
tinue Interest Payments.
Special Dispatch to The Star.


NEW YORK, August 20-When for
eign governments and states sold dollar
bonds to the American investor they
in most cases contracted to retire the
entire bond issue by maturity through
the operation OF semi-annual or an
nual sinking fund. 1t Is this feature
OF the contract that is now rising up
to plague them, especially those coun-
tries in which there is dificulty In OBJ
tanning exchange to meet commitments
on external loans
The sinking fund was not only pro-
vided as a means Of gradually ex-
tinguishing these foreign debts but as
market stabilizer Where purchases
for the sinking fund ran into sizeable
amounts they frequently did protect q
bond issue from the effects Of general
market disturbances or liquidation in
the particular issue.
The sinking funds that took the
greatest amount Of bonds of the market
have been those Of French, Belgian,
German, Italian and Argentine loans.
The French Republic 7l2 per cent loan
Of 1921, originally $l00 900, 900, was re-
duced over $39, ,000, 900 in the first five
years of its life. Then the contract
to buy further bonds expired.
Other Obligations.
The French per cent loan OF 1924
contains a sinking fund agreement by
which $4,000 900 bonds are retired an
nually. This loan at the end of 1881
will have been reduced from Sl00, ,00o,-
900 to approximately $4,000, 900. The
German government external 7 per cent
loan of 1884 Is reduced $3.50. 900 .
year. From the original amount Of
$l10 ,000,0 900 1t will be about 81, 4,000, 900
next October.
Argentina has 10 loans in dollar form,
all of which contain sinking fund
clauses under which, to date, approx
mately $1,000, 900 has been paid down
on the principal. It Is stipulated In
the contract attached to each of her
loans that purchases Of bonds are to 'be
made below par through tenders, and
If funds are not so supplied for 80 days
| after payment, bonds are to be drawn
by lot at par. The cumulative annual
sinking fund consists Of an amount
equal to l per cent Of the maximum
principal amount of the bonds issued.
plus an amount equal to interest &C.
crued and unpaid on all bonds acquired
through operation of the sinking fund
to the date Of such sinking fund pay
ment. 1t Is also stipulated that an in
crease In the sinking fund percentage
is permitted.
Apparently anticipating some such
situation as now exists, a few borrow
ers supplemented their sinking fund
clauses with the provision that they
might deliver bonds in lieu Of cash.
This stipulation is to be found in two
Of the government issues Of Chile, in
some of those Of Colombia, and In the
external loans of Uruguay and certain
Peruvian loans.
Recently Austria found it impossible
to assemble exchange sufhcient to
meet the regular requirements OF the
sinking fund on an external govern
ment loan. There is now considerable
effort being made to induce bondhold-
ers to waive the sinking fund agree
ment on certain external loans Of Ger
many. This Is also understood to be
contemplated in connection with the
government loans of Argentina.
Effect on Bondholders.
While 1t is a fact that the contract
between the borrower and his agent,
the banker, Is as binding with respect
to the sinking fund agreement and an
uninterrupted operation Of sinking fund
payments Is 1t is with regular payments
of interest, there Is wide difference In
IIle eueCb OIl LIlc pOIl0AfdOcA Va AO-
fauN In sinking fund payments and q
default in interest The bondholder Is
primarily concerned with the prompt
payment of interest and payment Of
principal at maturity. He cares rela-
lively little about the strict observance
of the sinking fund clause in period
of emergency and, in nine cases out OF
ten, would waive his right to the full
fillment Of this contract. The argu-
ment of the banker is that this right
cannot be abrogated unless all the
bondholders agree to it.
The same principle is involved In do
mestic real estate loans that carry an
amortization clause. The savings banks
and other large lenders on real estate
mortgages have. for months, been per-
mitting borrowers in distress to defer
the monthly or semi-annual amortiza-
ton payments and are thankful when
they receive the interest due them at
stated periods. 1t is felt that If the
large sinking fund payments TO which
foreign governments and states are OBJ
ligated could be waived for a few years
it would rescue some of them from
threatened defaults and preserve the
integrity OF their credit at no real sac
rifice to the bondholder Consequently.
efforts are being made to postpone
sinking fund payments by countries at
present finding it difficult to obtain ex-
change for the necessary transfers.