This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
The bond issues put out by mining companies, lumber companies, and other concerns, the chief property of which consists of "wasting assets" - that is, assets which in the ordinary course of business are used up and not replaced - are customarily protected by sinking funds calculated on the annual wastage. Timber bonds, for instance, which are secured by tracts of standing timber, are customarily issued up to about 50% of the market value of the timber. The mortgage securing the bonds must contain strict provisions which operate to insure the regular deposit of an agreed amount per thousand feet for all timber cut sufficient to retire all the bonds when about one-half of the timber is consumed; these deposits to be applied to the payment of principal of the bonds as the several serials, semiannually or annually, become due. The mortgage makes provision for keeping careful check upon the cutting of the timber and accounting for the same to the mortgage trustee.* $3 to $3.50 per thousand feet of lumber seems to be generally regarded as a fair sinking fund provision. The same principle is followed in accumulating sinking funds for mines. For example, the Great Lakes Coal Company sets aside for this purpose, 5 cents per ton, run of mine coal. The Iroquois Iron Company sets aside 25 cents for each of the first 400,000 tons of iron ore mined and shipped each year, with an additional 15 cents per ton on all shipments running in excess of 400,000 tons.
* Extract from circular issued by Messrs. Clark L. Poole and Company, quoted in T. S. McGrath's "Timber Bonds," p. 34.
There are many different special provisions for the maintenance of sinking funds and for giving greater security to bondholders. In 1899 the New England Cotton Yarn Company issued $6,500,000 5% first mortgage bonds which were covered by a sinking fund of 1% on the outstanding amount, payable before any dividend disbursements on the preferred stock, with an additional sinking fund of 4% payable before any dividend disbursements on the common stock. The Baldwin Locomotive Works has an authorized issue of $10,000,-000 first sinking fund gold 5's, the mortgage of which provides that the net quick assets of the corporation shall at all times equal the aggregate indebtedness including the outstanding bonds. Similar provisions requiring that net quick assets shall bear a fixed relation to the total indebtedness are not uncommon with manufacturing and trading companies.