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writers. The method is thus described in the Erie circular of 1895: “A syndicate of $25,000,000 in money has been formed to subscribe to $15,000,000 of the prior lien bonds of the new company, and to take the place and succeed to the rights of holders of preferred and common stock of the New York, Lake Erie & Western who do not deposit their stock and pay the assessments.” In this case the cash requirements of the new company were met by the sale of securities and by assessment upon the stockholders. The sale of this amount of prior lien general mortgage bonds to a syndicate necessitated a reduction of the grade of other securities in order to keep the fixed charges well within the estimate of net earnings.'

The St. Louis & San Francisco Reorganization Committee made the bondholders of the road its underwriters. Of the $6,841,000 required, $5,500,000 was to be raised by the sale to the bondholders of $5,500,000 of new mortgage bonds and $19,250,000 of stock. For $670 in cash, a bondholder was offered $670 in new mortgage bonds, $469 in first preferred stock, $670 in second preferred stock, and $1,206 in common stock. The ordinary compensation of the underwriters is the margin between the value of the securities at the time of purchase and the value under improved conditions, and this margin, as already noticed, is in the case of some stocks very large. When bonds are purchased, they are usually taken at a substantial fraction below the market, price. A stock commission may also be paid. The under

1 The Erie plan of reorganization offers an amusing instance of the inducements which can be held out to the stockholder to pay up promptly. Arrangements had already been made with the syndicate to furnish $15,000,000 of the $25,000,000 required. The remaining $10,000,000 was to be raised by an assessment of $8 on the preferred stock and $12 on the common. The managers, however, were able to offer a substantial discount for cash. They stated that the assessment was $12 on the preferred and $18 on the common, “but as prompt deposit of the securities and an early payment of a considerable assessment fund are important, a deduction of $4 per share on the preferred stock and $6 on the common stock will be allowed on account of the assessments above mentioned to such depositors as deposit their stock within a short period discretionary with the committee."“ Commercial and Financial Chronicle," vol. 61, P. 369. This is analogous to the practice of marking up goods before marking them down.

writers of the Union Pacific Reorganization Plan received for their services $6,000,000 in preferred stock, of which $1,000,000 went to the banking house which managed the reorganization. The compensation to reorganization managers where large interests are involved is usually $500,000 or $600,000 exclusive of expenses. The banking firm of J. P. Morgan & Co., during the last few years, have had charge of most of the large operations of this nature.

The Bond Reserve.

In addition to the providing of cash for immediate requirements, the reorganization committee must see to it that the necessary capital for betterments is secured. Each year a large sum should be spent on betterments by every wellmanaged road. Failure to do this invites disaster. The downfall of most railroads has been assisted by insufficient equipment and poor condition. So far as this expenditure results in an increase in earning power, it may be paid for by an issue of bonds. But an increase of debt is not easy to manage when bondholders have been heavily mulcted by reckless issue of bonds. They are apt to be very cautious in the future, and many reorganization plans during the twenty years preceding 1893, contained an express prohibition against any increase of the funded debt without the consent of a large majority of the bondholders.

This consent it was naturally hard to obtain, and some roads were prevented from making the most necessary improvement by the inability to obtain the consent of bondholders to an increase of the debt. In their circular of August 31, 1895, the Reorganization Committee of the Erie Railroad remarked of this prohibition as follows: “The absence of any such provision for capital expenditure has always been one of the chief sources of embarrassment of the Erie system, and has made it imposible for that system to keep up with its competitors, or to adapt itself to handling business with that economy which the character of its traffic necessitates." In the later reorganizations, the necessity of some provision for increase of capital has been clearly seen. It was, however, necessary, in order to gain the consent of stockholders and junior bondholders, from whom sacrifices were demanded, that they should be protected against the danger of reckless bond issue by the new company. Indeed, this solicitude for the stockholders' interests has been carried to such a length that, so far from conditioning the increase of funded debt upon the consent of the bondholder, it is the stockholder who must sanction an issue of bonds above the amount specified by the plan of reorganization, and in almost every case, two-thirds of the holders of one or both issues of stock must give their consent before any increase of debt can be made. It is necessary, therefore, if provision for necessary capital expenditures is to be made, that some expedient should be adopted which will not disgruntle the stockholder nor the junior bondholder. This expedient has been found in the bond reserve. A certain amount of the first mortgage bonds which are created by the new company, it is provided, shall be held in the treasury, and their issue shall be authorized only to a limited amount each year. Thus, in the plan of reorganization of the Norfolk & Western Railroad, issued March 12, 1896, it was provided that, "$9,690,436 (of the first consolidated mortgage four per cent bonds) is to be reserved for the construction or acquisition of side tracks, second tracks, branches and equipment, and for other improvements and additions to the property covered by the first consolidated mortgage, and for other requirements of the new company; but such bonds are to be issued only subject to suitable restrictions to be prescribed in the mortgage securing the same, at a rate not exceeding $1,000,000 for each fiscal year after June 30, 1896): it being understood that any portion of such $1,000,000 of bonds remaining unissued in any one fiscal year may be added to the amount that may be issued in subsequent years."

This provision is in the interest of the stockholder, for it insures to the road an ample provision for betterment expenditure, while protecting the stockholder against reckless increase of funded debt. The bond reserve, moreover, makes the creation of floating debt largely unnecessary, for the greater number of the objects for which floating debt is created are specifically included in the permission given for a periodical issue of bonds.

Reduction of Fixed Charges. The needs of the present have now been provided for. The floating debt has been paid, and provision has been made for sufficient capital expenditure to ensure the highest efficiency of operation. The committee on reorganization must now address itself to the more difficult task of reducing fixed charges so that they will come well within a conservative estimate of net earnings. The fixed charges of a railroad may be broadly divided into charges for leases and rentals, and charges for interest. The first can be more easily reduced than the interest charges. So long as a company is solvent, it must live up to its contracts, but a reorganized bankrupt is entirely free from the obligations and agreements of the old company. Bankruptcy has wiped out the old scores, and the new company need assume only such contracts as its organizers consider to be necessary to the success of the road. If a leased line has proved unprofitable, it can be dispensed with, or, if retained, the rental can be reduced. If a traffic agreement has proved unsatisfactory, a new arrangement can be made. If guaranteed interest on a branch line or a coal company has proven to be in excess of its contribution to the earnings of the main system, the interest may be reduced or the guarantee not allowed to stand. The reorganization committee has a free hand. They cannot be held to old agreements. Old contracts have lapsed, and must be renewed by the new company before they become binding against it. For this reason, every reorganization results in freeing the road from a part of its lease-rentals and guarantees. The most notable examples of a reduction in mileage by reorganization are furnished by the Wabash, with a reduction of 1,541 miles, and by the Richmond & West Point Terminal 4,479 miles. These cases are paralleled by the Atchison, which released the Atlantic & Pacific Railroad in its reorganization of 1895, and by the Reading, which abandoned the Central of New Jersey in 1892 and the Lehigh Valley in 1893. A more common method than the reduction of mileage, however, is the reduction of rentals. The owners of the leased line have usually no choice but to accede to the propositions of the reorganization committee for a reduction of charges. Their property is of little value outside of a large railway system, and, as a rule, the system in connection with which it is most valuable, is that with which it is already connected. The result is that the reduction in contracts by reorganization usually takes the form of a decrease of charges rather than a decrease of mileage. The extent of the reduction in rentals from reorganization is seen where the reduction of this item of fixed charges for the entire country is considered. The net reduction in lease rentals from 1892 to 1898 was $24,527,000, and of this sum $17,768,000 appears in the South and West where the failures were most numerous and extensive. The reductions of rentals are most conspicuous in the Northwest and Pacific coast railroads. It is true that a part of this decrease in rentals is to be ascribed to the steady movement in the direction of consolidation which is constantly converting lease into purchase, but coming so close together, the difference between the figures of 1892 and those of 1898 is sufficiently marked to warrant the conclusion that most of the reduction is due to the numerous reorganizations which intervened.

Reduction of Interest. We come now to the most difficult part of the task which the reorganization committee have set themselves. The holders of some of the bonds must make sacrifices.

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