In order to simplify the charges, as well as for other reasons, it is desirable to have the item of interest bear a large proportion to the whole. The fixed charges of six of our seven reorganizations from 1893–8 amounted together to $54,562,165. Of this sum, interest on bonds comprised $35,239,146 or some 64 per cent. The charges of the same railroads after reorganization amounted to $36,533,040, of which sum interest on bonds comprised $30,926,638 or 84 per cent.
The distribution of losses should bear most heavily on the junior securities. The simplest readjustment would seem at first sight to demand a proportionate concession from all creditors. But this would be both unjust and impossible. In no sense do all bond- and stockholders stand upon an equal footing. In the first place, the cost at which senior bondholders have acquired their claims has much exceeded the cost at which junior bondholders and stockholders have acquired securities of equal nominal amount. Apparently equal claims represent very unequal investment. In the second place this increased cost has been due to certain legal provisions touching security which become prominent during reorganization. All mortgage bonds possess by law a lien upon the property pledged to secure them. Upon default in repayment of principal, and usually also upon default in payment of regular interest, their owners have the right to sell the pledged property at auction and to recoup themselves from the proceeds. After the underlying bonds have been satisfied the selling price is applied as far as it will go to the settlement in full of mortgages in the order of their issue; while the stock, representing the owners of the property, takes what is left. As a rule a railroad will not sell for anything like the sum required to pay off all its mortgages, and the junior issues are threatened with extinction. Usually, however, it is possible for the junior to guarantee interest on the senior bonds, or to buy the railroad at foreclosure sale under some senior mortgage, thus preserving to themselves the benefit of the earning power of the corporation. When this is done earnings are distributed according to the relative priority of the various junior issues on penalty of still further foreclosure and readjustment. The principle of reorganization which is followed prescribes because of this the payment in full of all claims which can be satisfied by the purchase price of the bankrupt railroad at foreclosure sale, and the distribution of losses among the remainder according to the relative priority of their liens.
The consent of securityholders to a reduction in their claim to an annual return is more easily obtained if the nominal value of their holdings be little or not at all reduced. There is a magic in the par value stamped upon a certificate which affords a certain consolation to those from whom sacrifices in interest are demanded. An unimpaired principal, moreover, constitutes a real advantage when the date of maturity arrives. But if the low earning power of the corporation compels it to ask sacrifices from the holders of its securities, it is only fair that these sacrifices should cease when the earning power improves. In other words, it is but just that old bondholders be given securities upon which payment of interest is optional, so that they may share in future prosperity, and obtain the same return which they once enjoyed whenever the road earns enough to pay it.
The foregoing rules dictate the amount of reduction to be made in charges, and also the kind and amount of new securities which are usually offered in the exchanges. Interest and rentals must be cut down without decreasing the nominal value of the securities outstanding. To reduce interest without reducing nominal value, either the interest rate on outstanding securities must be lowered, or mortgage bonds must be replaced by income bonds or by stock. To reduce rentals annual payments may be arbitrarily cut down, or rental contracts may be funded into mortgage bonds. These different methods may be taken up in some detail.
The accompanying tables (see opposite page) show for fourteen reorganizations the number and amounts of outstanding issues before and after reorganization at the various rates of interest designated.
Few collections of figures in railway finance deserve more careful attention than those given in these tables. Whereas the greatest number of the issues before the seven reorganizations prior to 1893 bore 6 per cent, and the greatest amount outstanding was similarly at that rate; the overwhelming preponderance in amount after the reorganizations of 1893–8 bore 4 per cent, and a total of 14.7 per cent of all the bonds outstanding bore a lower rate of interest than had appeared at all at the earlier date.
BOND ISSUES
| Seven Reorganizations, 1893–8 | |||||||
|---|---|---|---|---|---|---|---|
| Before | After | ||||||
| Per Cent | Number | Amount | Per Cent | Number | Amount | Per Cent | |
| 7 | 33 | $56,741,222 | 6.1 | 13 | $43,942,500 | 4.9 | |
| 6 | 85 | 300,925,695 | 32.7 | 30 | 82,586,000 | 9.3 | |
| 5 | 51 | 267,623,426 | 29.0 | 23 | 90,853,035 | 10.3 | |
| 4½ | 11 | 34,490,800 | 3.7 | 5 | 13,400,000 | 1.5 | |
| 4 | 9 | 260,055,689 | 28.2 | 16 | 520,709,117 | 59.0 | |
| 3½ | 2 | 76,733,350 | 8.7 | ||||
| 3 | 1 | 53,350,000 | 6.0 | ||||
| 189 | $919,836,832 | 99.7 | 90 | $881,574,002 | 99.7 | ||
| Not specified | 5,141,238 | 1,000,529 | |||||
| $924,978,070 | $882,574,531 | ||||||
| Seven Reorganizations before 1893 | |||||||
| 7 | 40 | $153,251,000 | 23.7 | 21 | $81,327,544 | 10.3 | |
| 6 | 59 | 173,641,790 | 26.8 | 55 | 150,999,589 | 19.1 | |
| 5 | 22 | 174,060,032 | 26.9 | 16 | 180,341,768 | 22.8 | |
| 4½ | 2 | 4,611,000 | .7 | 1 | 79,000 | .01 | |
| 4 | 5 | 140,041,700 | 21.6 | 5 | 375,881,614 | 47.6 | |
| 128 | $645,605,522 | 99.7 | 98 | $788,629,515 | 99.81 | ||
| Not specified | 5,712,749 | 8,940,939 | |||||
| $651,318,271 | $797,570,454 | ||||||
Graphically indicated the change was as follows:
