File No. 815.51/187.
Mr. Charles A. Conant to the Secretary of State .
Dear Sir: I beg to reply herewith to your request for my views of the financial aspects of the proposed loan by American bankers to the Republic of Honduras, made under the convention by which the United States proposes to cooperate with Honduras in the matter of collecting the customs revenue.
After careful examination of the text of the proposed contract, of which copy is enclosed,1 I am satisfied that its terms are just, equitable and beneficial to the Republic of Honduras and are as favorable as she could reasonably be expected to secure from responsible banking houses in view of the present and recent condition of her finances.
The proposition embodied in the agreement between the Republic of Honduras and the bankers is, in brief, that an issue of $10,000,000 in five per cent bonds is to be authorized by the Republic, of which a sum of $6,354,000 is to be taken at once by the bankers. In exchange for these bonds the bankers are to deliver to the Republic old debt [Page 563] to the face value of about $19,750,000 and cash to the amount of $2,100,000 (U. S. gold), which is to be applied to the adjustment of certain internal claims, and to the improvement and extension of the Interoceanic Railway and the acquisition of said railroad and of wharf properties, including the adjustment of claims against such properties.
Of the remaining $3,646,000 of bonds, the sum of $1,146,000 is to be held for the redemption of old bonds at the rate of $170.46 for each bond of $1,000 face value, this being equivalent to a rate of 15 per cent, in cash, with the bonds at 88; and the balance of $2,500,000 is to be held in reserve, to be issued in future for public improvements, if found advisable.
Put in tabular form, the bonds authorized are to be applied to various purposes in about the following proportions:
| Redemption of old debt under existing option | $3,366,000 |
| Held for redemption of old debt, when presented (balance after five years may so to improvements) | 1,146,000 |
| To pay for cash for settlement of internal claims and railway and wharf property | 2,386,000 |
| To cover expenses and charges | 602,000 |
| Held for future internal development | 2,500,000 |
| $10,000,000 |
The bankers take the new issue of bonds at a rate of exchange which is equivalent to a price of about 88 per cent, of par. The Republic could hardly sell bonds at a price as favorable as this, or anything approximating it, without the friendly cooperation of the United States, in some such manner as is embodied in the proposed convention. This cooperation should contribute to inspire confidence in the payment of the interest and principal of the bonds as they become due, so far as the resources specifically set aside by the convention and by the agreement shall prove adequate for this purpose.
These resources, so far as they consist of receipts from customs, do not appear to afford at present an excessive margin above the requirements of the contract. Estimating the customs receipts at $800,000 per year (U. S. gold), they would be drawn upon to the extent of $375,000 for the interest on $7,500,000 in five per cent, bonds and to the amount of $75,000 for a sinking fund of one per cent, per year. This would leave for the expenses of collecting the customs and for payment to the general Treasury of Honduras about $350,000. If, however, the entire amount of bonds authorized,—$10,000,000—were issued, the requirements for interest and sinking fund would [Page 564] be $600,000, and the balance for other purposes would be only $200,000. Experience in Santo Domingo seems to show, however, that collections increase materially under a more rigid administration.
The ultimate profits of the bankers and of those through whom they distribute the bonds will depend upon the price at which the bonds can be sold to the public. For the $7,500,000 in bonds to be immediately issued (exclusive of the $2,500,000 reserved for issue in the future), the bankers will pay in cash about $2,961,000 for $19,750,000 (£4,050,000) in old bonds now under option at 15 per cent.; $1,008,500 for old bonds not yet under option; $2,100,000 for the railway and pier and for adjustment of claims; and about $529,900 for legal and other expenses, making a total of $6,600,000. This total is the exact equivalent of $7,500,000 in bonds at 88. For each point of one per cent, above the price of 88 at which the bonds can be sold by the bankers to the public, there will be a profit (if all are sold at the same price) of $75,000.
These figures include, however, the profit to be derived by the bankers from the exchange of $1,146,000 in new bonds for old bonds outstanding, a portion of which will be delayed in presentment and a portion will probably never be presented. Upon the bonds reserved for future issue, to the amount of $2,500,000, the option will remain with the Minister of Finance of the Republic to authorize their issue only when the terms offered by the bankers are satisfactory to him. It is to be considered that, even if a fair ratio of profits is obtained by the bankers, it will be at the expense of much greater labor and delay than ordinary loans at home. An issue of railway bonds for $50,000,000, for instance, if sold at a commission of two per cent., would afford a profit of $1,000,000, with much less labor for investigation, than this issue of $10,000,000 to replace obligations which have been long in default.
While the acceptance and execution of the proposed convention with the United States and of the proposed contract ought ultimately to give to the securities of Honduras a credit and value approximating to those of the Dominican Republic, the conditions under which the bonds are to be issued do not justify the expectation of such results at once. The first offer made for the Dominican five per cent, bonds was 96, and the price at which they were ultimately issued was 98½; but before the first offer the modus vivendi under which an American acted as receiver of customs had already been some time in force and a considerable sum had been deposited in a New York bank for the service of the debt. These events confirmed the belief that the proposed system could be successfully carried out and that the amount realized for the service of the debt would be more than sufficient for the purpose. Remittances to New York on account of the debt service under the modus vivendi of March 31, 1905, down to August 31, 1907, were $3,318,946.97. The amount required to be remitted was 55 per cent of total customs collections and the amount required for interest (exclusive of sinking fund), on the entire loan of $20,000,000 provided for in the agreement of 1908, was $1,000,000 annually. So favorable were the results obtained by American administration that it became possible in 1909 to make important reductions in the tariff, which explains the falling off, for the fiscal year 1910, in the statement of total customs collections as presented in the Annual Report of General Clarence [Page 565] R. Edwards, Chief of the Insular Bureau of the War Department. These figures are as follows:
Revenue of Santo Domingo.
| Period. | Total Customs. | Part Allotted to Fiscal Agency Account. |
| April 1–June 30, 1905 | $523,880.12 | $254,158.79 |
| Year ending June 30: | ||
| 1906 | 2,712,821.55 | 1,287,158.73 |
| 1907 | 3,200,299.44 | 1,481,045.12 |
| 1908 | 3,446,448.20 | 1,630,487.76 |
| 1909 | 3,338,467.57 | 1,159,890.95 |
| 1910 | 2,893,042.34 | 1,260,000.00 |
| Total | $16,215,052.22 | $7,072,741.35 |
It is probable that if a modus vivendi were arranged with Honduras similar to that which was arranged in the case of the Dominican Republic, and an issue of bonds were made after it had been several years in operation, a higher price could be obtained for them than at the present time; but it is to be considered that the adoption of such a policy would require the consent of Honduras; that it would require the abandonment of the options now held upon the old loan and perhaps result in larger demands from the holders of this loan; and would postpone for several years, if not indefinitely, the benefits expected by Honduras from the definite adjustment of her debt and the rehabilitation of her credit and the early application of new cash to much-needed internal improvements.
A consideration of importance to the bankers in distributing such a loan is the present state of the investment market. There has been for some time an indisposition to take any risks in regard to securities, which has been evidenced by a great fall in quotations and extreme dullness in the stock market. It is possible that this condition of affairs will tend to send investors into the market for bonds in lieu of stocks; but such a movement has not as yet acquired sufficient momentum to deprive of grave elements of uncertainty a proposed new issue by a government whose obligations have been in default.
In pursuance of your authority to consult with Mr. Frederic B. Jennings, as representative of the bankers, a number of changes have been made in the agreements as first drawn. Several of these were secured at a consultation held on Tuesday, September 6th, between Mr. Jennings on the one hand and Mr. T. C. Dawson and myself on the other, and the others at subsequent conferences between Mr. Jennings on the one hand and representatives of the Department and myself on the other. The more important of the changes which have been thus made are as follows:
- 1.
- A more exact definition of the amount to be paid by the Collector General to the fiscal agent for the amortization of the bonds. In the original draft this was ambiguous.
- 2.
- The striking out of a paragraph which made the ratification of the convention “in a form satisfactory to the bankers” a condition precedent to the examination of the railway property by engineers on behalf of the bankers.
- 3.
- A provision that the new bonds which may not be required for the redemption of old bonds shall be left in the custody of the fiscal [Page 566] agent until their application for other purposes becomes legal and receives the approval of the bankers. The original provision called for the delivery of all these bonds after a term of years to the Minister of Finance, in whose hands they might have remained for a long time and perhaps would never have been required in full for the redemption of old bonds.
- 4.
- The fixing of a term of two years for the submission and settlement of old claims, after which time the balance set aside for the purpose will become available for the reconstruction of the railroad. In the original agreement there was no provision as to the time to be taken for settling such claims.
- 5.
- The insertion of a provision that the sum of $2,500,000 in new bonds, held in reserve for further improvements in the Republic, shall not be available for issue except with the approval of the bankers, communicated through the Department of State of the United States. This will enable the Department to subject to scrutiny any proposed plans and contracts for the employment of the proceeds of these bonds, and to transmit only such plans as offer substantial advantages to Honduras.
- 6.
- The insertion in the proposed fiscal agreement of a provision that the grant by the Republic to the fiscal agent of the Interoceanic Railroad and the wharf at Puerto Cortez shall be only “in trust for the holders of the bonds.” The insertion of this clause was required to establish clearly the fact that the grant was in the nature of a mortgage security and not a transfer of the final title.
- 7.
- The change in the rate of premium at which bonds may be called for redemption from five per cent, to two and one-half per cent. The time after which such calls may begin is changed from five years to ten years. The fiscal agent is authorized in the meantime to buy bonds at the market price, but not exceeding the proposed rate of premium for called bonds. Under a similar provision of the contract with Santo Domingo, several hundred thousand dollars worth of bonds have been purchased for the sinking fund at a price below par.
In conclusion, I would repeat what was said at the outset—that the opportunity afforded to the Republic to readjust a debt which now represents $124,000,000 by a bond issue of $4,512,000 (exclusive of the amounts applied for other purposes) is an opportunity which comes but rarely to any State, and if all parties are now ready to subscribe the necessary agreements, this fact alone would go far to militate against embarking again upon the possibilities of long delay and uncertainty which the rejection of this adjustment and the effort to find some other would almost necessarily involve.
Yours very respectfully,
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