It is a common practice among railways, in buying cars, locomotives, etc., to mortgage the same and sell securities secured by this mortgage to raise money for the payment of the equipment. These obligations are known as " equipment bonds," " equipment notes," " equipment trust certificates," etc., or, when upon cars only, " car trust certificates," etc. A manufacturing concern might also issue " equipment securities."
Equipment Trust Certificates of a railroad company are the direct obligation of the company, in addition to being secured by a first mortgage upon the equipment named, no part of which should be released until the entire issue is paid.
The safety of such issue depends largely upon what proportion the issue bears to the actual cost of the equipment, and whether or not it is to be paid off fast enough to prevent the equipment mortgaged depreciating in value below the amount of the certificates outstanding. (See also " Car Trust.")
This form of short time obligation has been looked upon very favourably from the investment standpoint. It is stated by one financial writer that few defaults in this country have occurred in these securities. They have commonly been issued up to about 80% of the cash value of the equipment, and in serial form, payable about 10% annually.
The " Philadelphia Plan " is the method used in Pennsylvania to get around the law against conditional sales. Possession implies ownership, but personal property may be transferred by contract or lease to a Trust Company in Philadelphia and the title remains in the bailor as against the bailee's (railroad's) creditors.