Bonds of

Private

Corporations

Income Bonds

Mortgage bonds may be secured upon lands, buildings, manufacturing plants, telephone and telegraph systems, street car lines, franchises, toll roads, bridges, railroad rights of way and equipment - in short, upon tangible property of all kinds. Sometimes the bonds are designated according to the nature of the security, as for example, termina1 bonds, which are bonds issued by railroad companies upon the security of the valuable lands used for stations and office buildings and for switch and storage yards, etc., in the cities where their lines terminate.

Collateral trust bonds are bonds issued by a corporation and secured by bonds or other securities owned by it and deposited with a trust company, or, it may be, in the hands of individual trustees, though the former is more usual. This form of bond is sometimes resorted to by corporations owning bonds of other corporations, which they do not wish to sell, or which they may not be able to market without their guaranty. It is most frequently used by corporations that make real estate mortgage loans, which they pledge as security for their own bonds bearing a lower rate of interest.

Debentures are unsecured bonds, and are a comparatively rare form of obligation for private corporations, owing to the difficulty of placing them on favorable terms.

Of many methods adopted to float a bond issue, the most usual is to enlist the services of one or more of the banking houses, trust companies, investment companies or firms making a specialty of dealing in such securities. In the case of a private corporation the officers are required to make a full and explicit statement of its affairs, its assets and liabilities, its earnings past, present and prospective, the amount of the proposed bond issue, an exact description of the property to be covered by the mortgage, and any other facts which may be relevant or which the dealers may require. If the showing appears favorable the appliFloating a Bond Issue

Security for Bonds cant is informed that if upon thorough investigation the facts prove to be as stated and everything is found satisfactory the bonds will be negotiated. The bond dealers then detail their own representatives or agents to make the investigation, which is made in the most thorough and careful manner, and includes a searching inquiry into the character and standing of the officers and directors of the company making the application, its credit and business connections. Even when these are well known it is usual to revise previous information and make sure that it is in all respects up to date. The expense of the investigation falls upon the applicant, which may be required to make a deposit in advance, of a sum estimated as sufficient to meet the cost. Appraisers are employed to estimate the value of the property, and expert accountants are set to work to examine the company's books. In short, every available means is used to ascertain its true condition. The dealers also employ special counsel to report upon the legal status of the applicant, whether it is conducting its business clearly within the limits of its charter, whether it holds indefeasible title to its property, etc., and to see that all the formalities required by law are complied with when the bonds are issued. The result of all these investigations being found satisfactory, the next step is the execution of the mortgage, which is usually made in the form of a deed of trust to some trust company. Then the bonds are issued and may be offered for sale. Sometimes the dealers sell them on commission, and sometimes they buy them outright. In the latter case, if the issue is a large one, they may form a syndicate, or special partnership arrangement by which several dealers contribute the necessary capital and share in the profits of the transaction. Individual purchasers of bonds run less risk in buying those that are thus placed on the market by some house of established reputation, because as the company or firm that finances the issue usually invests its own or borrowed capital in the bonds until they can be sold, they can rely upon all the precautions mentioned having been taken by the dealers for their own protection.

It is customary to include in the deed of trust securing a bond issue a clause providing that if the interest is not paid promptly as it matures, the entire amount of principal and interest may, at the option of the bondholders, after default has continued for a certain number of days, "become immediately due and payable." To prevent one or two holders of small lots of bonds exercising such option in derogation of the interest of the holders of a majority of the issue, holders of some specified proportion of the issue are usually required, under the provisions of the trust deed, to unite in requesting the trustee to institute foreclosure proceedings before such action is begun. Foreclosure having been decided upon, the trust company files a bill in the proper court, alleging the default and praying that it be allowed to sell the pledged property in satisfaction of the debt. In the majority of cases the bondholders file a bill at the same time, asking that a receiver be appointed to take charge of the affairs of the company and conserve its assets for the benefit of all concerned. Not infrequently such action is taken by the stockholders before the bondholders have had time to act. If there is opposition, the court as a rule refers the case to a master in chancery, who, as an officer of the court, takes testimony and makes a report to the court, whereupon, if the report sustains the allegations in the bill, a receiver is appointed.

The receiver is also an officer of the court and makes reports thereto as often as may be required. Should the foreclosure proceed to a sale and all of the property of the company be swept away his functions thereupon cease. It often happens, however, in the case of railroads or other large corporations, that the bondholders do not wish to bid in the property at the sale and assume the conduct of the business, nor do they wish to run the risk that no other bid will be sufficient to pay the debt. And it may also be the case that holdings of bonds and stocks are such that the interests of the respective owners are complicated. Furthermore it may appear possible to conserve the interest of all concerned, stockholders as well as bondholders, by postponing the foreclosure sale, which lies within the discretion of the bondholders, and endeavoring to effect a reorganization of the company upon a basis which will enable it to continue its business and give both the bondholders and the stockholders new and marketable securities in place of those previously held.

Reorganizations are customarily effected through the medium of committees composed of bankers or others skilled in finance, who represent the various interests and endeavor to formulate a plan which shall be acceptable to all. The first task of a reorganization committee is to get authority from the bondholders and stockholders to represent them, which is no small undertaking in the case of a corporation the bonds and stocks of which are widely scattered, in Europe it may be as well as in this country.

Although the procedure is called reorganization, the customary method is to form a new company which bids in the property of the old organization at the foreclosure sale; and then issues its own bonds and stocks against the same and such new capital as may have been provided. In this way the interest of stockholders and bondholders who do not participate in the reorganization is eliminated. Non-participating bondholders get only such percentage of the proceeds of the sale as their bonds bear to the total issue, and as there are very likely no other bidders aside from the reorganized company it is usually enabled to make a low bid. Non-participating stockholders of course get nothing. Sometimes, however, when circumstances appear to justify it, and their holdings are small, non-participants are permitted to join the new organization after the sale on payment of a sum exacted as a "penalty."

Many reorganizations of American railroads are the conseReorganization quence of the vicious system of financing employed at the time they were constructed. Too often the bond issue was made large enough to pay the entire cost of construction and equipment and also a handsome profit, for the promoters, the stock being either retained by the promoters or given as a bonus to help the sale of the bonds which could not otherwise be marketed. If the road could be made to earn the interest on the excessive issue, well and good; if not, then disaster must follow, sooner or later.