Consolidated And Refunding Bonds

The consolidated bond is a bond wherein are merged a number of bonds previously issued. A railroad may have created in former years a series of bonds directly secured by its physical assets. Some of those bonds may have been placed when interest rates were high, while the others were sold in later years at a time when it was much easier to borrow capital. The railroads, to escape this situation, evolved what is known as the consolidated bond. This was done through the making of a general, or as it is called, a blanket mortgage, providing that amounts of such consolidated bonds be retained by the road to equal the bonds already outstanding on the property, so as to replace them when they fall due. In this manner the railroads were in a position to obtain additional funds without pledging additional collateral.

Almost like these are the refunding bonds. Originally, they sprang into existence as a means whereby the railroads could refund high-interest-bearing bonds which, when the road was first building, it was necessary to sell to tempt capital into the project. It was the practice in the early days of railroad building to make a loan for fifty years. Usually the interest paid was 6 per cent; sometimes it was as high as 7 per cent. What was further to the detriment of these early loans, was that no calling provisions were embodied in the mortgage; therefore these bonds had to run until their expiration. Fifty years almost covers the longest period of development in our steam railroads. It takes us back to the very beginning of our Civil War, a period when the construction of railroads was still in its early stages. In consequence there have matured and will mature, within the next decade, a number of these early issues of railroad bonds. It is to take up these bonds as fast as they mature, and to secure additional capital as found necessary, that refunding bonds bearing a lower rate of interest have been and are being issued.

Extension And Divisional Bonds

As its name implies, an extension bond is a bond created for the purpose of raising funds to extend the railroad. Usually the extension is pledged to secure the bonds. Such bonds may be named first mortgage extension bonds, or merely extension bonds. A divisional bond is almost exactly the same, it being an obligation of a division on a railroad distinct from the rest of the system; so also a branch line bond. There are many such bonds in existence.

Unifying And Adjustment Bonds

Among the bonds of some of our railroads will be discovered what are called unifying bonds, meaning bonds created to unify in one issue a number of underlying bonds and to reduce the interest, which differs on the several issues, into one rate. Other railroads call a bond similar in purpose an adjustment bond, implying that with the issue the intention has been to adjust the bonded debt into one class and have one given interest rate.

Lien Bonds

A lien bond denotes the obligation in accordance with its number or name; for example, a first lien bond is really the direct mortgage bond, although some railroads call this particular issue a prior lien, implying it has preferences over all other liens or bonds outstanding. A second lien bond is like a second mortgage. A third lien follows in sequence and so forth. Quite naturally it may be assumed that each lien bond on the same collateral has behind it a lesser degree of security than the lien ahead of it.

Often a railroad plans improvements on a certain section of the road already covered by a mortgage, and raises the capital by selling what is known as an improvement bond - a bond presumably secured by the improvements contemplated, although in reality subject to bonds already in existence, inasmuch as the improvements can have little value if detached from the underlying structure.

The railroads likewise have found it convenient, when they wish to expand, to acquire other roads. This is often a much cheaper method than to construct a new line in the same territory. This has brought into existence what are called purchase line bonds, the proceeds of which enable the railroad to secure control of a rival or a feeder. These bonds usually are a lien on the acquired road, subject sometimes to bonds that may be already pledged against it. There is also the construction bond, a security issued for capital to undertake new construction. There is the purchase money bond, akin to the purchase line bond, only a little broader in scope in that it may mean that the money can be used to purchase something else than another road.

There is the tax exempt bond, so named because it is free from taxation by state or city, not through any legislative provision, but by the mere fact that the railroad itself has agreed in its mortgage to take care of all the taxes; or it may, by legislation, be freed from all taxes in certain states. Here it might be mentioned that in some-states, in order to increase the number of desirable securities in which the funds of its savings banks may be safely invested, tax-free provisions are held out and also provisions whereby certain types of bonds become legal for investment for the funds of such institutions. This explains the phrase so frequently occurring in the circulars of bond dealers, "legal investments in such and such states."

Serial bonds are like lien bonds, as, for example, the Chicago, Milwaukee & St. Paul general mortgage bonds. The total issue is $39,978,000, and of these bonds a little over $31,000,000 comprise the Series A bonds and the remainder are the Series B bonds. A railroad finds it sometimes convenient to split a large bond issue into different series and name the several issues in this manner to give them a distinct identity and maturity.