Railroad Reorganization

by Stuart Daggett

Second, a reduction in fixed charges.

Third, the sale of securities to pay off the floating debt.

Consolidation of properties was found advisable for several reasons. “While some of the companies show a surplus of earnings,” said the committee, “in many instances it has been impossible to apply such surplus earnings to make up deficiencies arising from the operations of other companies. The committee finds that the various systems have not been operated throughout for the common benefit of the controlling interest, but that they have competed among themselves for business, each system maintaining separate organizations for obtaining business.... In the judgment of the committee the only adequate remedy which can be adopted is to unite the several corporations, as far as practicable, in one system under one management, and to consolidate their obligations.”

In order to unify the system the committee proposed three great issues of new securities as follows:

$170,000,000 four per cent first mortgage 35-year gold bonds, to be issued by a new corporation representing the consolidation of the Richmond & Danville Railroad Company and the Richmond & West Point Terminal Railway & Warehouse Company.

$70,000,000 five per cent non-cumulative preferred stock.

$110,000,000 common stock.

In general, the new bonds were to exchange for old bonds and the new common stock for old common and preferred, while the new preferred stock was to be joined in varying proportions with each of the other issues to make the exchanges look attractive. Thus, for the Richmond & Danville consolidated 6s were offered 120 per cent in new bonds and 45 per cent in new preferred; for the East Tennessee first mortgage 7s 120 per cent in new bonds and 45 per cent in new preferred stock; for the Richmond Terminal common stock 100 per cent in new common and 50 per cent in new preferred. This arrangement was not rigidly adhered to. Some of the poorer of the outstanding stocks received new common only, and the Richmond Terminal preferred was given par in new bonds besides a bonus in preferred. These were, however, exceptions. The principle which determined the various ratios of exchange is more difficult to discover. It was not that of equivalence of return. The plan did not attempt to allow to each holder a chance at the same receipts which he had formerly enjoyed while reducing the amount which he could demand, but gave sometimes more than this and sometimes less. And the variations from what might be called a normal ratio did not always correspond with the relative security of different issues as indicated by their market quotations. For instance, the East Tennessee first 7s sold in December, 1891, at 113½ and the Richmond Terminal collateral 6s at 83; yet the former received 120 per cent and 35 per cent and the latter 120 per cent and 40 per cent in new bonds and preferred stock respectively. Again, the Atlanta & Charlotte first 7s sold in October, 1891, at 118½ and received under the plan 120 per cent in bonds and 40 per cent in preferred stock; the Richmond & Danville consolidated 6s sold at 109 and received 120 per cent and 45 per cent. It is clear that the committee desired to reduce the interest which the various classes of bonds should have a right to demand, and that it expected to make compensation by means of preferred stock on which payments should be made if earned. So much of its scheme was commendable. On the other hand, the rates of exchange of old securities for new were in many cases ill-advised. The reduction in fixed charges was to be $1,819,837, although by the exchanges alone the capitalization was to be increased by over $50,000,000. The charges on the system had amounted in 1891 to $9,474,837.[356] Net earnings had been $8,744,736. Fixed charges under the plan were to amount to $7,666,000. As a matter of fact they would have been greater than this, for some of the old bonds would have remained outstanding, and the estimate did not include interest on any bonds issued for improvements. The floating debt was to be retired by the sale of new securities, namely, $18,235,800 new first mortgage bonds and $6,382,530 preferred stock. These were to net $14,588,640, or sufficient to cancel a debt of $6,310,000 and car trusts of $2,369,564 and to provide a balance for miscellaneous uses. A syndicate guaranteed the sale, but holders of stock or of collateral trust 5 per cent bonds were to be allowed to subscribe up to 16 per cent of their holdings at the rate of $800 for one new mortgage bond and $350 in new stock. New bonds to a maximum of $10,000,000 were to be issued only for the acquisition of additional property, while beyond this the vote of a majority of preferred stock was to be required to authorize any additional mortgage on property covered by the first mortgage.[357]

Such was the plan laid before securityholders. It proposed a considerable reduction in fixed charges, though probably not enough to put the company out of danger, and a large increase in new securities. It failed because it imposed losses upon the wrong parties. As between the various classes of bonds its terms were frequently inequitable. As between the bonds and the stock it altogether favored the latter. It levied no assessment, it compelled no subscription to new securities, and in three cases only did it announce an intention of reducing the nominal value of the stockholders’ holdings.[358] The original time limit for deposits was set at April 14, 1892. This was subsequently extended, but without effect, and on May 16 the Olcott Committee announced that the plan had failed.[359]

The collapse of this attempt at readjustment was a blow to those who had hoped for a speedy and amicable reorganization of the Richmond Terminal system. On the same day that failure was confessed the stockholders met and appointed Messrs. W. E. Strong, Samuel Thomas, and W. P. Clyde a committee to confer with the Olcott Committee to ascertain what had best be done. A week later General Thomas reported a plan for the reorganization of the Richmond & Danville alone. The Richmond Terminal Company, he said, should be wound up and be succeeded by a new company with $43,000,000 of preferred stock and $70,000,000 of common. The present 6 per cent bonds should be given 170 in new preferred stock; the present 5 per cent bonds and preferred stock par in new preferred stock; and the present common should receive par in new common and be compelled to subscribe for $8,000,000 collateral trust two-year 6 per cent notes at 92½.[360] This amounted to an assessment of 10 per cent upon the common. It was not proposed to pay off the floating debt with the proceeds of this assessment, but to buy the claims held by bankers, and, if necessary, foreclose these claims and take possession for the stockholders. If the full amount should not be subscribed by the stockholders the preferred stock was to have the right to make subscription for the balance, and to take the securities that would have gone to the non-paying common stock; and the common stock not subscribing was to have no rights to the common stock of the new company.[361]