Railroad Reorganization

by Stuart Daggett

Action looking toward reorganization of the East Tennessee, Virginia & Georgia began with the year 1886. In January Mr. Nelson Robinson,[308] who had held proxies for a controlling stock interest at the previous election, returned from Europe; and after a conference with certain large bondholders agreed with them to draft a plan for the reorganization of the property. A reorganization committee was chosen from members of large banking firms,[309] meetings were held, and in the first part of February, 1886, a scheme was put forth. This plan comprised the following points:

(1) Reduction of fixed charges;

(2) Exchange of new bonds and preferred stock for old bonds;

(3) Assessment on the junior securities;

(4) Foreclosure.

Foreclosure was to take place under the consolidated mortgage. A new 5 per cent seventy-year consolidated mortgage was then to be created. Enough of the bonds under this mortgage were to be reserved to retire the liens prior to the existing consolidated mortgage as they should mature, and the balance was to be used for taking up the outstanding consolidated mortgage bonds, the Cincinnati & Georgia division bonds, and the ten-year debentures. It was estimated that the exchanges would reduce the annual interest charge from $1,757,460 to $994,737.[310] This necessitated considerable demands upon old securityholders. Thus the old consolidated mortgage bonds bearing 5 per cent received only 60 per cent of their face value in new consolidated bonds with the same rate of interest; and the old 6 per cent Cincinnati & Georgia division bonds received only 48 per cent in consols, besides suffering a decrease in interest rate from 6 to 5 per cent. The difference was made up by the allowance of preferred stock, to which, moreover, was given the right for five years to elect a majority of the board of directors, unless before that time the new company should have paid out of its net earnings 5 per cent dividends on such preferred stock for two full successive years. To the Cincinnati & Georgia division bonds were given 62 per cent in new first preferred besides the 48 per cent in bonds,—a total of 110 per cent; upon which the yield in prosperous times might exactly equal the yield on the securities which they surrendered. To the consolidated bonds were given 50 per cent in new first preferred, making possible a total return greater than that which they had formerly enjoyed. For the debentures was made the same provision as for the divisional bonds. In order that net earnings might go first of all to the prior liens and to the above securities, new second preferred and common stock was issued for the benefit of the old income bonds and stock. Of these the income bonds received 100 per cent in new second preferred; while the old preferred received 100 per cent and the old common stock 40 per cent in new common. Only in return for their assessments did the income bonds receive first preferred stock, and even for their assessment the common stock took second preferred. Cash assessments were 5 per cent on the income mortgage and 6 per cent on the new common stock. This was expected to yield $2,475,000, which, with a surplus of new securities in the treasury of $1,534,000, was thought sufficient to liquidate outstanding car trusts and to provide the company with a fund available for future use.[311]

The plan may be criticised in some respects. It made no adequate provision for future capital requirements. Two millions and a half of cash and two millions of securities were considerable sums in hand, but of these over half a million was in the form of stock, and from the rest had to be deducted at least a million and a half for the liquidation of car trusts. This left, it is true, enough for existing needs,[312] but it did not allow for constantly recurring and legitimate demands for improvements out of capital in future years. Moreover, the securities given for the consolidated, the Cincinnati & Georgia division, and the debenture bonds exceeded by 10 per cent the nominal value of the bonds retired by them. But on the whole the reorganization plan was an excellent attempt to solve a difficult problem. It proceeded on a sound principle, it laid the burden on the proper parties, it avoided a funding of current liabilities, and even in respect to the volume of securities outstanding it accomplished a much needed reform by wiping out 60 per cent of the almost worthless common stock.[313] It was accordingly accepted by the securityholders. On March 18, the reorganization committee obtained a decree of sale.[314] By May 1, practically all the consolidated and income bonds, with a majority of the preferred stock, had assented;[315] and on May 25, 1886, the East Tennessee, Virginia & Georgia Railroad was sold for $10,250,000 to a representative of the reorganization committee. Previous to this the opposition committee, which had been formed by the minority stockholders, had disbanded.[316] The final step was the organization of the East Tennessee, Virginia & Georgia Railway, which on July 1 took over the title to the East Tennessee, Virginia & Georgia Railroad and branches, a controlling interest in the stock of the Knoxville & Ohio, and a controlling interest in the stock of the Memphis & Charleston Railroad Company.[317]

During this time the Richmond & Danville had not been standing still. It will be remembered that in 1883 the capitalists who dominated the East Tennessee and the Coast Lines had purchased a controlling interest in this company, with the purpose, according to Mr. Brice, of confining all their railroad and steamship lines under one management and of operating the system in the best possible manner. These gentlemen had found the earnings of the Richmond & Danville sufficiently unsatisfactory and the need for improvements sufficiently great to lead them to pass the interest on its debenture bonds in October, 1883. The net earnings for 1882, out of which this dividend would have been paid, they found had been fully taken up by the fixed charges and the expenses for new equipment and betterments. The net earnings for 1883 they believed sure to show large gains, but still not likely to be equal to necessary expenditures.[318] Strict economy was to be the order of the day. In the three previous years the company had accumulated a large floating debt. This the new management reduced more than one-half by the end of 1885. The funded debt it allowed to increase largely, but the earnings it managed somewhat to improve. In general, however, it secured no very striking gains. Union in interest with the East Tennessee and the Coast Lines modified the severity of competition, but the panic of 1884 checked business, and the real saving in operating cost was very slight.[319]

In their search for means to reduce expenses the owners of the Richmond & Danville came across the Richmond & West Point Terminal Company. By 1884 this company was in peaceful possession of 1815.8 miles of railroad, which included all the important branches of the Richmond & Danville except the North Carolina Railroad, from Goldsboro to Charlotte, and the Atlanta & Charlotte Air Line, from Charlotte to Atlanta. It had been obliged to issue notes to retire its floating debt in 1883,[320] but had no earnings apart from dividends on the stock which it held, and no expenses other than its cost of administration and the interest on the notes above mentioned and on its floating debt. There was a possibility, nevertheless, that the maintenance of the company involved the Richmond & Danville in unnecessary outlay, and caused a certain loss of efficiency through indirectness of control. The Terminal Company had originally been necessary because the Richmond & Danville could by its charter hold stock in none but connecting lines. By 1885 this prohibition had been removed, and there was open an opportunity to consolidate the system.

Early in 1886 the directors of the Richmond & Danville appointed a committee to report a plan of union with the Richmond & West Point Terminal.[321] Apparently this committee recommended the elimination of the Terminal Company; for in April it was known that the Richmond & Danville was trying to buy from the Terminal the stock of certain of the more important branches which it had formerly controlled.[322] In that month the Richmond & Danville leased the Virginia Midland Railway[323] and the Western North Carolina; in May it took over the Charlotte, Columbia & Augusta and the Columbia & Greenville; in June the Northeastern of Georgia; and in October the Washington, Ohio & Western, or a total of 1483 miles out of the 1839 held by the central corporation.[324] At the same time the Richmond & Danville transferred into its own treasury $13,617,400 in stock and bonds of subsidiary companies, giving in return 25,000 shares of the Terminal’s own stock, and a guarantee of the Virginia Midland’s general mortgage bonds. This done, the Danville Railroad threw the rest of its holdings of Terminal stock upon the market; where they were bought by investors who knew nothing of the above transactions. The operation left the Terminal high and dry. It was of no further use to the Richmond & Danville, for that company had made arrangements with its branch lines direct; and it could not launch upon an independent existence, because the greater part of its mileage was in its rival’s hands.