The Minister in El Salvador (Corrigan) to the Secretary of State

No. 590

Sir: I have the honor to refer to the Legation’s despatch No. 579 of February 8, 1936, informing the Department that the Salvadoran Government had approved the bases for a new agreement revising the External Loan Contract of 1922, and to enclose a copy of a form [Page 576] of agreement26 which was handed to me on February 13, 1936, by Mr. Douglas Bradford, Secretary of the Bondholders’ Protective Committee and their representative in recent negotiations with the Government of El Salvador. Mr. Bradford believes that the final agreement will in all probability be substantially as given in this draft.

The new rates of interest that would be established under this agreement would be as predicted in recent despatches on the subject: 5½% on the “A” bonds, 4% on the “B” bonds, and 3½% on the “C” issue. The total annual payment for interest, amortization, and the partial redemption of the outstanding scrip, would be $849,063.35. The plan which the draft provides for the retirement of the scrip on the “C” bonds (numbered paragraph 9–b) is that mentioned in the despatch referred to above as favored by Mr. Bradford: the setting aside of a Scrip Fund to total $270,308.50 out of the annual payments, for the purchase of outstanding scrip during the next five years at the lowest possible price at which it can be obtained, not to exceed 25% of its face value (that is, approximately its present market value). The question of the scrip on the “B” bonds (the British series) is covered separately in paragraph 11 of the draft agreement. Payments on the loan will be resumed as of July 1, 1935, and the new agreement would be considered as bearing the date June 30, 1935.

In view of the Department’s previous instructions to the Legation, it is believed that the Department will be particularly interested in the draft agreement’s provisions regarding bonds not deposited with the Committee, and in the continuance of the so-called “security” provisions of the original 1922 Loan Contract.

Reference is made in the first connection to the Department’s instruction No. 97 of April 5, 1935, and to its enclosure, a letter of the same date addressed by the Department to Mr. F. J. Lisman, Chairman of the Committee.27

The question of the scope of the draft agreement and of deposited and non-deposited bonds is covered in numbered paragraphs 12, 13, and 16, which, for convenience, are quoted below:

“12. Any holders of Bonds of Series “A”, “B” and “C”, whom the Committee or the Council represents and is or shall be acting for, who desire to avail themselves of the benefits of this Agreement and assent hereto may do so by presenting their Bonds, with coupons maturing July 1, 1935, and subsequently attached, to the Paying Agent, or to such agent as it may designate, for stamping, and only such Bonds and coupons as are stamped with legends substantially as hereinafter set forth shall be entitled to the benefits of this Agreement.”

[Page 577]

(Here follows the form of Legend.)

“13. Nothing herein contained shall be deemed to give to any holders of Bonds not deposited with the Committee or the Council any right to deposit the same with the Committee or the Council except upon such terms as may hereafter be agreed upon by the Committee, the Council and the Republic; nor shall the Committee or the Council be deemed to have any right to represent, or to have represented, any holders of Bonds not now or subsequently deposited with the Committee or the Council.”

“16. The Republic agrees that it will not make any agreement with any other Bondholders of the Bonds of Series “A”, “B” or “C”, on more favorable terms than this Agreement. Nothing contained in this agreement shall affect the rights and remedies of Bondholders who do not assent to the provisions hereof.”

As regards the “security” provisions of the 1922 Loan Contract, reference is made to the Department’s instruction No. 80 of February 25, 1935,28 and to the Legation’s despatch No. 210 of April 12, 1935.29 The Department’s instruction referred to the possible omission from a revised agreement of any reference involving the Government of the United States or any of its officials. The Legation’s despatch forwarded to the Department, among other documents, a copy and translation of an undated Memorial prepared by the Salvadoran Ministry of Finance and sent to Mr. Fred Lavis, then representing the Committee in San Salvador, on April 2, 1935, in which it was definitely stated that any new agreement must provide for the payment of the expenses of the local Fiscal Office by the bondholders, and also a copy of a letter from the Minister of Finance to Mr. Lavis dated April 8, 1935, in which he referred to the opposition of Salvadoran public opinion to the clauses of the Contract providing for arbitration by the Chief Justice of the Supreme Court in cases of dispute, and held that under the Salvadoran Civil Code these clauses were illegal and void. Led by interviews given out by the Minister of Finance, the local press at that time instituted a violent campaign against the “security” clauses of the Contract, and it seemed for a time that the Government was resolved to make the revision of these clauses a sine qua non of any new agreement. The press campaign, however, died out during the summer, and has shown no signs of revival since that time, and as far as the Legation knows the Government has not brought them up in recent conversations with Mr. Bradford.

The new draft Agreement specifically calls for the Government’s payment of the expenses of the Paying Agent and its representatives in El Salvador; paragraph 15 reads as follows:

“15. The Republic agrees to pay all the expenses of the Paying Agent, and its representatives in El Salvador, in accordance with the [Page 578] provisions of the Loan Contract of 1922 regarding the Fiscal Agent and its representatives, which provisions are made expressly applicable thereto, and in addition to pay fees of the Paying Agent in connection with the purchases of Scrip Certificates hereunder at the rate fixed in the Loan Contract for retirement of Bonds, plus all reasonable expenses of the Paying Agent incurred in connection therewith.”

Paragraph 17 would definitely make all unmodified provisions of the 1922 Contract an integral part of the new Agreement, and moreover provides that, “In the event of default by the Republic in the performance of any of the provisions herein contained this Agreement shall no longer be of any force or effect, and the rights and remedies of the Bondholders shall be those set forth in the said Loan Contract, with the same force and effect as if this Agreement had never been entered into or assented to by any Bondholders.”

Mr. Bradford is confident at present that the new Agreement, substantially worded like the enclosed draft, will be signed without the question of the “security” clauses coming up again. Apparently the reference to the United States Government and its officials mentioned in the Department’s instruction No. 80 of February 25, 1935, will remain a part of the Loan unless action is taken to effect their elimination.

Respectfully yours,

Frank P. Corrigan
  1. Not printed.
  2. Neither printed.
  3. Foreign Relations, 1935, vol. iv, p. 569.
  4. Not printed.