Reorganization Proposal
On February 1, 1899, the outstanding debt of the Central Pacific Railroad consisted of the following issues:
Under the proposed reorganization plan, the aggregate of $57,471,000 of securities listed was to be retired in exchange for $51,253,500 in new 4 per cent bonds, $13,695,000 in new 3½ per cent bonds, and $1,987,383.70 in cash. Generally speaking, the outstanding first mortgage bonds were offered par in new fours, with a slight bonus in new 3½ per cents. Junior mortgages received 50 per cent in new fours, and from 70 to 90 per cent in new 3½ per cent securities. After the retirement of outstanding first mortgages, the 4 per cent bond issue was then to be increased further by the amount necessary to provide the government with the collateral stipulated for in the negotiations. Thus the government was set on a par with outstanding first mortgage bondholders.
Here, however, was a real difficulty. It was plain that while the old first mortgage bondholders might consent to the retirement of the issues which they held by exchange for new bonds, on the terms stated, they would yet hesitate to allow the inflation of the first mortgage issue by putting out $58,000,000 first mortgage bonds over and above the amount of their holdings in order to satisfy a government claim hitherto secured only by a second mortgage lien. It must be remembered that the reorganization was a voluntary one, requiring for its success the free consent of all parties. Some additional considertion had to be offered at this point in order to satisfy first mortgage bondholders. It was at this juncture that the Southern Pacific Company stepped in, with a guaranty on both the new 4 per cent and the new 3½ per cent issues. The additional security provided by this guaranty was without doubt an element contributing strongly to the successful carrying out of the proposed exchanges. At the same time the guaranty was received with favor by the government, because it increased the government’s security as well as that possessed by former bondholders.
In subsequent years there was dispute as to how far the government relied on the Southern Pacific guaranty as an essential element in the security provided for the ultimate repayment of the government loan. Curiously enough, the fact of the guaranty was not mentioned in the original agreement of February 1, 1899, between the Central Pacific and the government, nor was it referred to in the report dated February 15, 1899, which the commissioners appointed to settle the Central Pacific indebtedness made to Congress, nor in the clauses of the refunding mortgage itself. But the testimony of all concerned is that the guaranty was understood to be a vital part of the agreement, and Attorney-General Griggs later went so far as to say that the Central Pacific bonds without the guaranty would not have been acceptable.[589] When the bonds to which the government was entitled were delivered to the United States Treasury Department, they had indorsed on them in proper form the guaranty of the Southern Pacific Company.
Treatment of Stockholders
In addition to the promises for settlement of the government debt, mention should be made of the allowance made to Central Pacific stockholders in the reorganization plan, and of the provision for cash requirements.
Some provision for cash requirements is a necessary part of any reorganization plan. In the case of the Central Pacific and Western Pacific, the cash requirements consisted of $11,762,543.12, which were needed to take up the first four notes issued to the government, and of $9,657,556.88 for new equipment, improvements, and other purposes of the new company, including expenses, commissions, compensation, and similar items incident to the reorganization. Speyer and Company, it will be recalled, had agreed to purchase the first four maturing notes issued to the government. The inclusion of the amount paid for these notes as a cash requirement of the Central Pacific was due to the fact that the money paid by the bankers for this purpose was regarded merely as a loan by the bankers to the railroad company. In all, the sum which it was necessary to raise amounted to $21,420,100. This money was raised by the sale to Speyer and Company, on behalf of a syndicate, of portions of the new 4 per cent and 3½ per cent issues aggregating $12,995,500, and by the issue of $12,000,000 of new preferred stock to the Southern Pacific in exchange for a like amount of that company’s 4 per cent bonds. In addition, the Southern Pacific agreed to take up $8,000,000 additional preferred stock of the Central Pacific, as issued, upon the same terms.