Railroad Reorganization

by Stuart Daggett

(a) To retire the principal of the outstanding 7.3 per cent bonds, and the interest to and including July 1, 1878, at 8 per cent, currency.

(b) To retire the land warrant bonds, principal and interest, to and including January 1, 1875.

(c) To pay the floating debt not protected under the existing orders of the court.

(d) Generally for the purpose of carrying the plan into effect.

Preferred stock was to have all rights and privileges of common stock, with the right to vote, and was to be entitled to 8 per cent out of net earnings before anything should be paid on the common, and to one-half the surplus after 8 per cent should have been declared on both preferred and common.[550] It was to be convertible at par into any lands belonging to the company, or thereafter to belong to it, east of the Missouri River in the state of Minnesota or the territory of Dakota, until default should occur in some of the provisions of the new first mortgage bonds, and the proceeds of all sales of such land were to be used in extinguishing the stock. Common stock was to be issued to the amount of $49,000,000, and was to be given to old stockholders share for share. To provide the means to complete and to equip the road there were to be issued first mortgage bonds not to exceed an average of $25,000 per mile of road, actually completed and accepted by the President of the United States, to be secured by a first mortgage on the whole line of road, constructed or to be constructed, and on the equipment, property, lands, and franchises, including the franchise to be a corporation, subject only to the right of the holders of the preferred stock to convert their stock into lands. The principal was to be payable in forty years, and the interest and sinking fund might be made payable in gold. No other bonds were to be issued except on a vote of at least three-quarters of the preferred stock at a meeting specially held in reference thereto on thirty days’ notice. Subsequently it was resolved, and the resolution incorporated in the plan, that the holders of the common stock should have no voting power until on and after July 1, 1878, and that no assessment should be levied upon bondholders; but that the cost of purchase and the expense of foreclosure and other proceedings should be paid out of the assets and the income of the company.[551]

Applying to this plan the same tests to which all other plans have been subjected, it appears that from the point of view of the corporation it left little to be desired. The general depression throughout the country and the needs of the Northern Pacific Railroad in particular were so great that for once, in the conflict of interests between the bondholders and the corporation, the latter had all the advantage on its side. As a matter of fact, had any attempt been made in this case, as so frequently in others of recent years, to unite in the exchange of new securities for old a bond and a stock as an equivalent for an outstanding bond, instead of giving stock only, the rate of interest on the new bond would necessarily have been so low as to deprive the combination of its attractiveness. That resource was not had to an income bond was perhaps due to the absence of English investment in the road. The wise course was the one pursued:—namely, to retire bonds with a fixed lien on earnings by stock which represented ownership in the enterprise, and which could claim dividends only when earned. The floating debt was not retired by an assessment but by new securities. This again, all things considered, was wise. The existing stock represented so little actual investment in the property that holders would doubtless have refused to pay an assessment, and would have surrendered their certificates instead; while it would have been both difficult to collect an assessment on the depreciated bonds, and hard to convince bondholders of the justice of a demand for such a contribution, so long as the stockholders were let off unscathed. On the other hand, whether or not an assessment would have yielded cash, the issue of stock for floating debt did not increase the fixed charges of the road, and was not, therefore, fundamentally unsound. Liberal provision was made for future capital requirements, and the only provision to which exception could have been taken was the limitation of bond issues to the moderate figure of $25,000 per mile except with the consent of three-quarters of the preferred stockholders. On the whole, the plan put the company fairly on its feet, presented it with all the work which had been accomplished, and bade it attempt again the project in which its failure had previously been so complete. The danger of future bankruptcy lay in this fact only: that a large section of the road was yet uncompleted, and through business was non-existent; that the Northwest was still unsettled, and the local business was small; in short, that so much was yet to be done that the company, with all the advantages which it now possessed, might fail again for the same reasons which had led it into bankruptcy before.

The plan was first reported on May 20,[552] and was laid before the bondholders on the 30th of June. There was some protest that it proposed giving away the property of the bondholders, and the additional sections before mentioned, concerning the expenses of the reorganization and the voting power of the common stock were added. By August nearly two-thirds of the bondholders had assented.[553] By May a decree of sale had been obtained, which was modified in August so as to give bondholders priority over claims of directors for advances made; and on August 12 all the property of the company, except the patented and certified lands,[554] with all its rights, liberties, and franchises, was sold at public auction and bought in by a purchasing committee for $100,000.[555] No upset price was set by the Court; and it was surmised that the bid was purposely made low in order to force non-assenting bondholders to accept the new stock. The new corporation was organized in October, 1875, by the election of Mr. Chas. B. Wright of Philadelphia as president, and with the denial of a petition to set aside the sale the reorganization may be said to have been concluded.

For fourteen years the company was now to be free from talk of further reorganization, and not until 1893 was there to be another receivership. During this time the mileage, owned or controlled, was to be made continuous from the Pacific coast to Chicago, and the Northern Pacific was to mount high among American railroads in its extent and in the volume of its business. In 1875 the completed mileage was, roughly, 550 miles of line; in 1893 it was 5431.92, and reached from Ashland, St. Paul, and Minneapolis on the east to Portland, Olympia, Tacoma, and Seattle on the west. In the former year the gross earnings were $414,722 and the net $97,478; in the latter the totals were $23,920,109 and $11,416,283. At the same time the fixed charges rose from nothing to $14,311,430, and the bonds outstanding to $133,545,500, besides $15,349,000 of bonds of subsidiary companies guaranteed. It appears, therefore, that the promoters were successful in raising funds for the completion of their enterprise, although their road suffered at first from the thin population of the Northwest and the lack of a through connection, and then from the competition of other transcontinental lines.

From the reorganization to 1879 very little was done in the way of new construction, owing to the general financial depression. Efforts to get the time allowed for completing the road extended failed, however, and it became necessary to resume in order to keep Congress contented and to avoid a forfeiture of the land grant. In 1878 a small loan was placed, and the following year one for a somewhat larger amount; and with the funds so secured construction was vigorously pushed. More liberal provision was made in 1880–1, when successful negotiations were carried through for the sale to a syndicate of $40,000,000 general mortgage 6 per cent railroad and land-grant bonds, to be issued at the rate of $25,000 per mile of finished road only, and to be secured by a mortgage on the entire property of the company except the lands east of the Missouri River, which were pledged for the redemption of the preferred stock. Provision was made for a reserve of these bonds sufficient to retire the prior issues before mentioned.[556] Under the agreement the syndicate took $10,000,000 at once and had an option of taking $10,000,000 per year in each of the next three years. The reported price was 90 for the first $10,000,000 and 92½ for the rest. As a matter of fact, the whole $40,000,000 had been turned over by the end of 1883, and though the effect on the company is seen in the increase in its bonded indebtedness from $3,881,884 in 1880 to $39,522,200 in 1883, and in its fixed charges from $334,482 to $2,478,939, it was meanwhile supplied with cash, and was enabled to advance toward the completion of the 1000 miles of line which remained unbuilt. The financial embarrassment which was felt in 1882, in spite of the syndicate contract, was due to an unforeseen cause. According to the statements of the company, it was felt necessary, in order to avoid waste of time and money, to build simultaneously from both ends of the line, and to start all the heavy work on the entire route at once. “This involved the shipment of millions of dollars’ worth of track material, motive power, and rolling stock to the Pacific coast many months before their actual use on the road; and on the line east of the Rocky Mountains very large expenditures of cash a long time before the works resulting from them could become parts of finished road.”[557] The expenses were immediate;—the delivery of bonds to the syndicate could take place by the terms of the contract only after the completion of finished sections of road, so that great stringency easily occurred between. The trouble was only temporary, and was tided over with the help of the syndicate and of the Oregon & Transcontinental Company, a corporation of which we shall presently speak.

As the Northern Pacific pushed into the Northwest, and at the same time vigorously occupied itself in filling the gap between the ends of its main line, it came into contact with a combination of Northwestern companies known as the Oregon Railway & Navigation Company, of which Henry Villard was at the time in control. This corporation owned a line of steamboats running on the Willamette and Columbia rivers in Oregon, together with an ocean line connecting Portland and San Francisco.[558] In connection with the water routes a narrow-gauge road had been built up the left bank of the Columbia River to a connection near the mouth of the Snake River with an existing narrow-gauge road to the town of Walla Walla in Southeastern Washington; and this narrow-gauge was being widened, in 1880, to standard. This was the very territory through which the Northern Pacific expected to make its connection with the Pacific coast; and in 1880 it had passed the Rocky Mountains and had reached the confluence of the Columbia and the Snake. On October 20, 1880, a contract was signed between the Northern Pacific and the Oregon Railway & Navigation Companies whereby the former, among other things, consented to a division of territory with the Snake and the Columbia rivers as the dividing-line; in return for which the latter agreed to complete a standard-gauge road within three years from the western end of the Northern Pacific, at the mouth of the Snake River, to Portland, and to grant the Northern Pacific the right, without the obligation, to run its own trains over it at a fixed charge per train mile. It will be remembered that the Northern Pacific was not at this time too easy in its finances, so that it was quite willing to secure connection with the coast without outlay of its own. Soon after the execution of the contract, however, the $40,000,000 loan earlier described was arranged for, and Mr. Villard feared that the road would build its own connection with Portland now that the means seemed to be at hand. To prevent it he conceived no less a plan than that of forming a new company which should purchase and hold a controlling interest in both the Northern Pacific and the Oregon Railway & Navigation Companies.[559] This was done, and the new corporation, known as the Oregon & Transcontinental Company, for a long time played a prominent part in Northern Pacific affairs;[560] aiding it in the construction of the main and branch lines, and time and again advancing money when the road was in straits.[561]