FIXED CHARGES BEFORE AND AFTER REORGANIZATION
| Seven Reorganizations, 1893–8 | |||||||
|---|---|---|---|---|---|---|---|
| Per cent Decrease | Per cent Increase | ||||||
| Absolute Charges | Charges to Income | Charges per mile | Absolute Charges | Charges to Income | Charges per mile | ||
| Atchison | 31.1 | 26.7 | 29.2 | ||||
| B. & O. | 11.7 | 12.1 | 9.6 | ||||
| Erie | 5.9 | 16.4 | 7.0 | ||||
| N. Pac. | 51.0 | 53.0 | 43.0 | ||||
| Reading | 20.8 | 26.2 | 32.9 | ||||
| Southern | 44.0 | 22.4 | 37.7 | ||||
| U. Pac. | 43.6 | 61.5 | 57.5 | ||||
| 30.9 | 31.2 | 31.2 | |||||
| Seven Reorganizations before 1893 | |||||||
| Atchison, ’89 | 34.9 | 33.6 | |||||
| Atchison, ’92 | 31.0 | 28.5 | 31.1 | ||||
| E. Tenn. ’86 | 33.0 | 40.8 | 31.3 | ||||
| Erie, ’75 | 2.9 | 11.0 | 12.7 | ||||
| Reading, ’80 | 15.3 | 20.2 | 49.1 | ||||
| Reading, ’83 | 7.9 | 2.2 | 17.9 | ||||
| Rk. I. ’80 | 16.3 | 22.7 | 20.6 | ||||
| 10.3 | 13.1 | .53 | |||||
| One Reorganization, 1902 | |||||||
| Rk. I. ’02 | 119.3 | 48.2 | 17.6[713] | ||||
These tables show plainly that substantial reduction in fixed charges was the rule in the reorganizations of 1893–8, though less universal and less important in the reorganizations before that date. Even before 1893, however, the fact that reductions must be made was apparent. Three reorganizations increased absolute charges instead of decreasing them. Of these the Atchison reorganization of 1892 was not due to lack of prosperity, and the Erie reorganization was a failure. The Reading reorganization of 1880 increased absolute charges, increased mileage more than correspondingly, but was also a failure. And it is significant that only those roads which generously reduced charges regained even a temporary prosperity.
The distribution of losses which a reduction in fixed charges requires can best be made by a comprehensive redistribution of securities. All the bonds and stocks which are to suffer must be called in; and varying amounts of new securities must be given in their place. Among the important considerations to those who fix the rates for exchanges are these:
(1) Maximum charges under the new régime should approximate minimum net earnings under the old.
(2) As large a proportion of the charges as possible should consist of the one item of interest on bonds.
(3) Losses should fall most heavily on the junior securityholders.
(4) The nominal value of outstanding securities should be reduced as little as possible.
(5) Bondholders whose claims have been cut down should be afforded some chance to participate in future increased earnings of the property.
These rules may be considered in turn. The point to which the best practice should reduce fixed charges is readily understood. Nothing less than solvency under the least favorable conditions is the goal toward which a reorganization plan should strive. It appears, accordingly, that the minimum earnings of the Atchison property from 1891–4 had been $5,204,880; while the fixed charges proposed for it were $4,528,547. The lowest net earnings which the Union Pacific had ever recorded had been $4,315,077. The interest on its new bonded indebtedness was placed at $4,000,000. The net earnings for the Northern Pacific in 1895 were $6,052,660, which was the least that the road had earned for eight years. The new fixed charges were estimated at $6,015,846. The minimum net earnings of the Baltimore & Ohio from 1887 to 1898 had been $6,610,774. The fixed charges of the plan of 1898 were set at $6,252,351.