Cut-Rate Financing

Hallowed by at least four generations of profitable practice is the underwriting of big bond issues. Advantage to the borrowing corporation is the fact that it gets its money in a lump sum on a definite date irrespective of current market conditions. And the "spread" between the price the corporation receives for its bonds and the price the public pays is supposed to compensate the banker not only for his time & trouble but also for his risks.

Last March the Manhattan firm of Salomon Brothers & Hutzler unceremoniously ditched this ancient underwriting tradition, marketed $43,000,000 of Swift & Co. bonds on a straight commission basis. Total selling cost for Swift & Co. was $172,000. Last week Salomon Brothers & Hutzler again startled their fellow bankers by selling $50,000,000 of 3 1/2% Socony-Vacuum Corp. bonds for a commission of four-tenths of 1% or $200,000. Fortnight before, Kuhn, Loeb underwrote a $50,000,000 Pennsylvania Co. issue for 2 1/2%--a relatively low "spread" for underwriting. Total cost: $1,250,000.

The marketing costs of various issues are not strictly comparable. One issue may be hard to sell, another easy, depending on the corporation's credit. An underwriter like Kuhn, Loeb may pay some of the legal and accounting fees involved in preparing an issue or may have spent months advising the company on a comprehensive financial program of which the bonds are only a part. But in the present money market it is clearly cheaper for super-solvent corporations to use a selling agent on commission.

Founded in 1910 by three Brothers Salomon, of whom two--Percy and Herbert--are still alive and at the head of the firm, Salomon Brothers & Hutzler has always been known largely as a dealer in Governments, municipals, high-grade corporate bonds, bankers acceptances, short-term paper. Because the late Arthur Salomon originally hoped to model his firm on the big London discount houses, advertisements are always signed "The Discount House of Salomon Brothers & Hutzler," though the term is almost meaningless today. Its bond and paper business keeps it in constant touch with banks and institutions, and the Socony issue was placed last week without the aid of dealers or a banking group. Moreover when the partners assembled in their private paneled dining room at No. 60 Wall st. at 8 p. m., they had earned their full $200,000 commission in one day's work.

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