The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1935-08-13

SEC Official Hints
of New Change
in Policy.
by VINCENT LYONS
Times Financial Editor

Times Financial Editor
THE Unfortunately cheap money
il era through which We are
passing has fOstered considerable
amount Of pique among the ranks
OF the nations investors. This va
riegated army. running the gamut
from the thrifty individual with a
few thousands TO the wealthy in
suranc company with millions
seeking productive outlets. is be-
ginning to shift uneasily because
Of the disappearing avenue Of at
tractive investment.
Widespread refunding operations
conducted by American industry
have nurtered the resentment. All
these units have done TO earn this
Is to call high coupon bonds and
preferred stock ana replace them
with securities OF a less expensive
nature. Now it isn't that the in
weston would want a moratorium on
these activities. What he does
want. though. is preferred consid-
Grafton in subscribing for the new
issue which mas been arranged to
replace the one he holds.
Recently representative Of the
hard working Securities and Elk
change Commission paid tribute 10
this growing feeling when he
limited that the commission IS
giving serious thought to the posi-
bilitv Of promulgating rule which
would give owners Of A called issue
first crack at a refunding issue.
NTHEN going concern with
w 10OO. 900 shares Of common
stock in the hands of the public
seeks TO acquire new capital
through the sale of 100000 addi-
tional shares it offers rights to cur
rent stockholders. These rights
entitle each owner of 10 shares to
subscribe for one new share. In
this manner the present holders
are given the first opportunity of
subscribing TO the new shares and
each owner. whether large or
small, receives the same treat
ment.
In the case OF preferred stock
and bond financing, however, the
situation is quite the opposite.
Where a security is TO be refunded
the company merely arranges for
the underwriting of new loan and
then calls the outstanding issue.
The underwriting group sells the
new loan to the general public and
ownecs Of the called issue have no
priority whatsoever in the opera
ton. The insurance company which
buys large blocks of issues will not
experience much difficulty Ordinar-
lily in getting the portion it wants,
but the little fellow with but $4,000
or so available is not so fortunate.
Thus. a situation of this sort can
very we'll turn out to be unhealthy.
A person of moderate means who
is dependent on the income from
several bonds may be forced into
the stock market in his search for
income. AS a consequence he places
himself in jeopardy of relinquish-
ing safety of principal. simply be-
cause the avenue of investment is
virtually closed to him.
THE SEC representatives hint
Il that some change might be
made in the existing order
would BAR such an eventuality by
giving the owner of a called Secur-
ity the first chance to subscribe to
a refunding issue Naturally. he
will receive less income from the
new bond than he did on the old,
but if his resentment is sincere he
will accept this. secure in the
knowledge that safety OF principal
is more assured than it would be if
he were forced to purchase stocks
or some other less attractive in
veStment.
Giving present owners first con-
sidaratiOn in refunding deals also
would be of benefit to both the
company whose issue is involved
and the underwriting syndicate.
The syndicate would be helped be-
cause a standing market is avail
able in the owners of the called
security: the company itself in the
fact that the underwriting costs
might be lower as a result OF the
standing market.
The Federal government follows
the practice of giving holders of
called bonds preferred conSidera-
ton in most of its financing opera
tions. OF course. it is true that
the Treasury's bond deals involve
huge sums of money and that the
widest market possible is sought.
AT the same time. however. owners
of called bonds are thankful for
the privilege. Without this pre-
ferred status their chances OF
getting the new bonds would be
very slim as the larger institutions
pad their Observation-Disclosures for
six and eight times the amount
they really want.