Railroad Reorganization

by Stuart Daggett

Second, the reduction of fixed charges to an amount which the companies could earn.[377]

The physical condition of the above roads in 1893 was extremely bad. “One obvious trouble ... is,” said the plan, “that their maintenance and repairs have been neglected. Another is that, while nearly all the lines in the United States have been steadily substituting solid roadbeds, heavy equipment, and other modern facilities for the light and ineffective appliances formerly in use, these lines, because of the constant drain to which they were subject for the obligations assumed, and from the necessities of the Terminal Company for the payment to it, as dividends, of every available dollar with which to meet its own obligations, have not been in a financial condition to keep up to the times in this respect, and now they find themselves so far behind as to be, to a considerable extent, unqualified to handle business with economy, or to compete successfully with other lines.”[378] The financial condition was little better. The absolute fixed charges of the Richmond Terminal, the Richmond & Danville, and the East Tennessee systems, viz., interest on bonds held by the public, rentals, equipment notes, and sinking funds, and interest on floating debts, receivers’ certificates, etc., the plan declared to amount annually to about $9,900,000. The entire net earnings for the fiscal year ending June 30, 1893, were estimated at $7,000,000. The result was a deficit for the year of about $2,900,000. This state of affairs required serious sacrifices from somebody. The Olcott plan had illustrated the folly of laying the burden largely on well-secured senior bonds. The Drexel plan proposed to demand the necessary concessions from the junior bonds and from the stock. “About $74,000,000 of the bonds and guaranteed stocks of the Richmond & Danville and the East Tennessee systems held by the public,” it continued, “are on properties which are believed for the most part to afford adequate security, and for this or other reasons this plan has not sought to disturb them. About $50,000,000 (mostly recent issues) are junior liens, inadequately secured, or else are on new or branch lines of uncertain earning capacity, and the holders, in self-preservation, must make such reasonable concessions as the situation necessitates, taking compensation therefor in preferred or common stock of the new company....”

The tools of the reorganization were to be the following new issues:

$140,000,000 first consolidated mortgage and collateral trust 100-year 5 per cent bonds, secured by mortgage and pledge of all the property of the new company. This total might be subsequently increased to acquire the whole or part of the Georgia Central system, or to acquire the ownership of the Cincinnati Southern Railway or any other line as a substitute therefor.

$75,000,000 5 per cent non-cumulative preferred stock.

$160,000,000 common stock.

“The general theory of adjustment of disturbed bonds,” said the plan, “is to substitute for them the new 5 per cent bonds to such an extent as is warranted by earnings and situation of the properties covered by the present mortgages, and the new preferred stock for the remainder of the principal. In some cases, where the bonds are on properties of no actual and little prospective earning capacity, a more severe reduction is necessary. In several instances, where the bonds are on properties which are likely to improve more rapidly than other disturbed parts of the system, this fact is recognized, and an extra allowance is made in compensation. Finally, in one or two cases, where the bonds are on properties the loss of which would adversely affect the rest of the system, a proper recognition is made of this fact.” In practice not only bonds and preferred stock, but preferred and common stock, or even common stock alone were exchanged for old securities of little value.

This provided for old securities but not for cash requirements. To raise cash three devices were resorted to, all of which bore entirely on the junior securityholders or on the stock. The most direct was the levying of an assessment. Terminal common stock was assessed $12.50 per share, East Tennessee first preferred $3, second preferred $6, and common stock $9; new preferred stock being in each case given in return. This distribution was based on the idea that the stockholders of each railroad should provide for its floating debt. The floating debt of the Richmond & Danville was about $7,000,000, that of the East Tennessee about $3,000,000, and that of the Richmond Terminal about $100,000. But since the last named held practically all of the Richmond stock and a considerable proportion of the East Tennessee, its stockholders were saddled with a total of $8,300,000 or an equivalent of $12.50 per share, while the East Tennessee was taxed proportionately. The rest of the cash requirements were covered by the sale of $8,000,000 new bonds at 85, and $33,333,000 new common stock at 15. Depositors of all classes of Terminal securities and of all classes of readjusted securities of the other systems were allowed to subscribe to the extent of $1000 in a new bond and $4000 in new stock trust certificates for each $22,000 par value of stocks or bonds deposited. The balance of the issues was looked after by an underwriting syndicate.[379]

Future capital requirements were provided for mainly by new bonds. $35,383,000 in new 5 per cents were set aside to be used only for new construction, betterments, purchase of rolling stock, and extensions and additions to the system. Not over $2,500,000 of these were to be used in any one calendar year; except that, in addition to this annual appropriation, a total of $3,000,000 in bonds might be specifically appropriated with the unanimous consent of the stock trustees, for the building of branches or extensions, if undertaken within three years after the creation of the new mortgage. All property acquired with these bonds was to be brought under the lien of the new mortgage. $8,000,000 of the cash raised by assessment and sale of securities, moreover, were to be available for new construction and equipment on the Richmond & Danville and the East Tennessee. And, finally, there was provision for the limitation of new bond issues, for a voting trust and for the consolidation of the Terminal system.

“The ultimate object of the reorganization,” said the plan “(excluding the Georgia Central Company from consideration), is to have the new company acquire, so far as practicable, the ownership of the Richmond & Danville and East Tennessee systems, including the various securities now owned by the Terminal Company ... and the securities pledged for the Richmond & Danville and East Tennessee floating debt....