Railroad Reorganization

by Stuart Daggett

The plan failed because the time allowed for deposits was too short. In spite of the objections raised 31,356 general mortgage bonds and 411,218 shares of stock were deposited in twenty-five days, and it was maintained that additional securities would surely be obtained to make up the percentages required. The managers alleged, however, that extension was impracticable, and announced that the scheme could not go through.[263]

The year following this attempt at rehabilitation was full of the struggles of different interests, each jealous of any concession and working devotedly for its own hand. Prominent at this time was Mr. I. L. Rice, the same gentleman who has before been quoted in connection with Mr. McLeod’s operations in New England stocks. Mr. Rice had been a member of the syndicate which had put Mr. McLeod into the presidency, and had served as foreign representative of the company during his régime. He had been instrumental in forming the anthracite coal combination, and at the time of the Reading failure had been in England raising money to finance the coal holdings then acquired.[264] Returning from Europe upon the appointment of receivers, he examined the Reading books with the results which have been noticed, and now appeared as the active enemy of everything connected with Mr. McLeod, even to the receivers who had succeeded him. In May, 1893, he resigned the seat which he had held on the Reading board, on the ground that the management had condoned the use by Mr. McLeod of the company’s securities in carrying on his private and personal speculations; in September he resigned from the income bondholders’ committee, and attacked in a circular the McLeod régime and the succeeding receivership;[265] and in December he applied for the removal of the receivers, alleging that they had grossly neglected their duties to the stockholders, and had ignored the financial transactions of Mr. McLeod prior to their appointment.[266]

In spite of his hostility to the existing régime, Mr. Rice hoped to rehabilitate the company without foreclosure or, indeed, formal reorganization. The action of others was inspired by a less optimistic view. The original suit on which receivers had been appointed had been brought by one Thomas C. Platt; but as early as March Alfred Sully and A. B. Rand of New York, and John Lowrie of London, holders of first and second preference income bonds, petitioned to intervene. In July Judge Dallas dismissed the Lowrie suit, but the petition was renewed in September, alleging that Mr. Platt “did not file his bill in good faith on his own behalf, and on behalf of all other holders of bonds, but at the request and for the benefit and protection of the men who were then managers of the Philadelphia & Reading Railroad Company and the Philadelphia & Reading Coal & Iron Company, and that the suit was not being pressed with due diligence.”[267]

All this time the receivers had been busy on a plan, which they presented in January, 1894. By leaving out of consideration some $5,000,000 of car trusts they arrived at the figure of $12,500,000 for the floating debt. This they proposed to cover by the issue of $6,000,000 in 6 per cent ten-year trust certificates, based on the stock of coal on hand, and by $10,000,000 in 5 per cent collateral trust bonds then in the treasury of the Reading Company. They hoped that a balance of $2,500,000 would then remain available for working capital or other purposes. General mortgage coupons were to be funded for five years, although the receivers planned to have a syndicate formed to purchase at par for cash the coupons as they matured, giving to the bondholders in each case the choice between receiving money or coupon trust certificates for the interest due. There was to be no formal reorganization, no cuts in charges, nothing but a provision for the floating debt and for a temporary funding of interest payments; and this was the more feasible because the Lehigh Valley lease had been by this time abrogated and the New England extensions definitely abandoned.[268] It will be remembered that to the plan of May, 1893, it had been objected that the provisions contrived to bring in the floating debt ahead of previously existing liens, and were a premium on a kind of financial juggling too common among American railroads. This plan, therefore, avoided a new issue of bonds, and used only what the treasury already possessed. The coal notes were obviously unobjectionable, and served at the same time to utilize the unsalable stock which the management had earlier accumulated. If their value should prove small the loss would fall on the holders of the floating debt and not on the owners of the general mortgage bonds; while the return to the company was assured by arrangement with Drexel & Co., Brown Bros. & Co., and J. Lowber Welsh on the one hand, and the Finance Company of Pennsylvania on the other. On the whole this plan was gentle even to tenderness with the creditors of the road, and its failure revealed clearly the bondholders’ state of mind. The holders of the general mortgage refused to fund their coupons for five years, they refused to fund them for two years, and they insisted that foreclosure proceedings should be instituted unless they should receive immediate payment of their interest. “In view of this,” the receivers were forced to remark, “it would be idle for [us] to continue the efforts to readjust the affairs of the company....”[269] The trouble with the receivers’ scheme was not that it demanded large concessions,—much larger had been asked and granted in 1887,—but that the general mortgage bondholders felt that on the one hand the road was very nearly earning fixed charges, so that in the contingency of a foreclosure sale their interests would be reasonably safe; and on the other that a demand for concessions so soon after a complete reorganization of the property was an irritant which might well be resented even at the risk of some pecuniary loss. Fortunately the assent of the bondholders was not necessary to the issue of the coal trust notes, and the receivers executed them under the authority of the court, practically as proposed.

In April, 1894, Mr. Simmons, chairman of the old general mortgage bondholders’ committee, resigned his position, and Mr. Fitzgerald, president of the Mercantile Trust Company, was chosen to succeed him. The committee presently issued a notice which, after reviewing its early activity, went on to say that it had believed it prudent to give the receivers every opportunity to familiarize themselves with the affairs of the company, but that in its judgment the time had come for action to enforce the rights of the bondholders under the mortgage.[270] In May, 1894, a new general mortgage committee was organized, with Mr. F. P. Olcott as chairman, designed not directly to oppose the Fitzgerald Committee, but to hasten the rehabilitation of the property. The committee prepared a bondholders’ agreement calling for the deposit of general mortgage bonds, and in a statement of their position said: “Difficulties in the way of a foreclosure and reorganization thereafter are exaggerated; if any danger is wrought by such foreclosure it will fall upon the junior securities and not upon us.”[271] Lastly, at this time, there was a committee headed by Mr. Earle, president of the Finance Company of Pennsylvania.

The first matured suggestion after the failure of the receivers’ plan appeared in what was known as the Olcott-Earle Agreement, published on September 25, 1894, which seems to have been in many respects a revival of that scheme. It proposed to cover the floating debt by the sale to securityholders of $10,000,000 collateral trust bonds, heretofore held in the treasury, and to fund coupons on the general mortgage 4s for five years. A syndicate agreed to advance $9,000,000, or as much thereof as might be needed, to buy the coupons as they should mature. The stock was to be held and voted by the reorganization committee until all the money advanced by the syndicate should have been repaid; that is, till June, 1898; a second syndicate guaranteed the sale of the collateral bonds at 70; and the preferred bondholders were asked to forego any claims for interest until all the general mortgage coupons should have been retired and cancelled. Certain other details are of interest. The collateral bond issue was to be taken up by the preferred bondholders and stockholders, each individual subscribing to 10 per cent of the par value of his holdings; but the bondholder might, if he preferred, pay 3 per cent of the par value of the securities he owned and receive nothing, instead of paying 10 per cent and getting a collateral bond. Securityholders were given 60 days in which to assent, and if at the end of that time the number of assents did not amount to practically all the interests involved, the committee proposed to reorganize by foreclosure for the benefit only of those who had assented to the plan; while for the future the committee was to provide by agreement with the railroad company that the latter should call an annual meeting of general and income mortgage bondholders and stockholders, at which bondholders as well as stockholders should vote in proportion to the par value of their holdings.[272]

It will be observed that the source of relief sought by this plan was precisely that of the receivers’ plan earlier described. Certain changes, however, of considerable importance were introduced. The subscriptions to the collateral issue were made distinctly obligatory, and an alternate assessment was provided; greater use was made of syndicate assistance; some voting power was given to the bonds; and a voting trust was added to ensure permanency of control to the designers of the reorganization till their work should be complete. On the whole there were still few concessions to creditors, and indeed could be few. Ten coupons of the general mortgage were to be funded, though it was made easy for the bondholder to get cash if he preferred it; the provisions concerning subscriptions to the collateral bonds were rather more burdensome than before; and the voting trust, while redounding to the ultimate advantage of creditors, was only indirectly a concession to their demands. The grant of voting power to the bondholders would have been a great concession, but the wording of the clause was vague and probably little practical effect would have ensued. As in the previous plans, no particular attention was paid to the reduction of fixed charges.

So much for the provisions of the plan. It was a hopeful innovation for the suggestions it contained to come from holders of general mortgage bonds, and seemed to give some evidence of a change of heart; especially since the Olcott Committee did secure the assent of a larger proportion of the issue than had accepted either of the propositions before brought forward. The Fitzgerald Committee strenuously protested, still insisting on the advisability of foreclosure; and further objections came from Mr. Rice and from the Hartshorne Committee. Nevertheless, the general mortgage as a whole gave its consent, and ultimate shipwreck was due only to the abstention of the income mortgage bonds.[273] It is not surprising that the income bondholders should have felt that the plan had little in it for them. They had been given no voice in its making,—their wishes had at no time been regarded. During the whole reorganization the question had been of the terms to which the general mortgage bondholders would consent, and the only sign of the existence of junior liens had been an occasional fearful inquiry as to what would become of them under foreclosure; until now the combination of a voting trust with the expenses of a syndicate reorganization, and an assessment upon them and upon the stock, touched the limit which they would stand. There was, moreover, at this time no question of the wiping out of the value of their holdings. The preamble to the Olcott-Earle plan stated that the annual charges were $10,477,560 and that the net earnings for 1891 had been $10,977,398; thus showing that something was left for the junior securities even after the payment of interest on all prior and general mortgage liens. It seemed also barely possible that the difficulties of a foreclosure, with the danger under the laws of Pennsylvania of losing the coal properties of the company, might secure better terms for the holders of junior obligations in case they should withhold their assent.

Early in January, 1895, the following official notice was issued: “The plan of readjustment, dated October 1, 1894, has not been assented to by a sufficient number of income bondholders and stockholders to make the same effective. The committee now hold over a majority of the general mortgage bonds, and have, in accordance with the bondholders’ agreement of May 7, 1894, and their circular of October 1, 1894, notified the trustees of the general mortgage to bring suit for the foreclosure thereof ... as expeditiously as possible.”[274] Suit for foreclosure was brought March 2 in accordance with the announcement, and the Junior Securities Protective Committee, an organization with purposes indicated by its name, was allowed to intervene.

Meanwhile the Fitzgerald and Olcott committees together prepared and brought forward the final reorganization scheme. The conditions now differed from those with which any previous plan had been confronted, in that it was no longer necessary to seek for as little change as possible, and a broader, more radical reorganization was in point. “Unless,” began the scheme, “the managers shall decide to proceed without foreclosure or sale, the properties of the existing Reading companies will be sold and successor companies will be organized under the laws of Pennsylvania, and the stock and securities of these successor companies will be vested in a new company formed, or to be formed, under the laws of Pennsylvania or of some other state.”