Lee, Higginson & Company to the Assistant Secretary of State ( White )
Dear Sir: We have received your letter of June 16 with further reference to Dominican financing, and in reply to your request for additional information regarding the refunding loan mentioned in Paragraph [Page 105] (7) on page 7 of our letter of June 9 take pleasure in advising you as follows:
As we have pointed out in previous discussions of Dominican financing, one of the principal causes of the present difficulties of the Dominican Treasury is the very heavy sinking fund payments which the Treasury has had to meet since 1930. You will recall that except for extraordinary amortization pursuant to the provisions of Article I of the Convention of December 27, 1924 the Dominican Government was required to make no sinking fund payments on its outstanding debt until last year. In March, 1930, the first monthly payment was made for the sinking fund on the 1942 maturities, and in August, 1930 the first monthly payment was made for the sinking fund on the 1940 maturities. Such payments now aggregate $1,851,667 annually and under the terms of the present contracts continue at the same figure until 1940 when one of the loans matures. As the total revenues of the Dominican Government for 1931 are tentatively estimated at $8,300,000, it appears that the sinking funds alone absorb about 22% of the Government’s income. This is a tremendous drain on the Government’s current resources, and unless there is an immediate return of prosperity in the Dominican Republic through a substantial appreciation in prices for sugar, coffee, cacao, and the other products of the country, (and no such return of prosperity seems to be in immediate prospect), we feel that no marked permanent improvement in the position of the Dominican Treasury can be expected until a refunding operation can take place which would lessen the annual sinking fund requirements.
Bonds of the 1942 maturity are now callable on March 1 of any year and Bonds of the 1940 maturity are callable on October 1 of any year, beginning with 1931. At the present time there is outstanding $8,759,000 principal amount of the 1924 issue and $8,661,000 principal amount of the 1940 issue, or a total of $17,420,000 for both issues. If market conditions permit, a refunding loan large enough to retire this entire indebtedness should be issued. It should also provide funds for the repayment of any short term advances which may in the meantime have proved practicable and any then existing recognized floating debt, and in addition provide for necessary public improvements. On the basis of the figures which have been submitted to us by Mr. Dunn and on the basis of our own examination of the problem, we feel that a loan of about $25,000,000 should be sufficient to meet the requirements of the situation, but whether the market will be able to absorb an issue of that size within the next year or so is a question we can not answer at the moment.
We do not feel that the actual details of a refunding loan can be agreed upon in advance of the time when the market shows promise [Page 106] of permitting the flotation of such an issue, because coupon rate, price, etc., depend on market conditions. It may well be that a long term refunding loan with only a 1% cumulative sinking fund provision, the influence of which would be almost negligible in so far as maintaining market prices is concerned, would have to bear at least a 6% coupon. Such an issue with a 6% coupon and a 1% cumulative sinking fund would be retired in about 33 years. Interest and sinking fund charges on a loan of $25,000,000 would thus be $1,750,000 per annum, or about $1,000,000 less than the 1931 charges of $2,851,149 on the existing debt of about $17,500,000. As stated above, $1,851,667 of this $2,851,149 represents the fixed annual sinking fund instalment required to be paid until the maturity of the 1940 issue. It is because of the financial advantages to the Dominican Republic of such an operation that we referred in our letter of June 9 to the desirability of immediate consideration by the Dominican Government and the Government of the United States of the questions involved in a plan for refunding the existing debt as soon as market conditions permit.
It must, of course, be borne in mind that any refunding loan must enjoy at least the same protection as that enjoyed by the present loans, and that it must in particular be covered by all the provisions of the Convention of December 27, 1924, so that customs revenues of the Dominican Republic will continue to be collected by the General Receiver of Dominican Customs and pledged as security for the service of the loan, as at present. We realize and sympathize with the reluctance which the Dominican Government may naturally feel in agreeing to bind itself to the continuation of the Customs Receivership for a period considerably beyond the maturity of the present outstanding issues. It is important to realize, however, that a return of prosperity may make it possible to shorten the duration of the Receivership by permitting a rapid redemption of the refunding bonds, while under conditions of prolonged adversity the benefits of the Convention will continue to accrue to the Dominican Government.
Very truly yours,