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.
In previous chapters the principal forms of security issues - common and ordinary shares, preferred shares, income bonds, debentures, collateral trust bonds, mortgage bonds, and the like - have been described. The point has been emphasized that, while there are favored and popular forms of security issues, there are no invariable forms. Some kind of a security issue can be found that will suit both the taste and the pocketbook of anyone who has capital at his disposal. The financial manager of a business enterprise will make it his business to make such adaptations of the securities he has to offer as will best fit them for the market he is trying to reach. If his prospective purchasers are people of small income, he may find it best to issue shares of a par value of $5 or $10, instead of the conventional $100. At the other end of the scale, if he is getting out a note issue exclusively for sale to some of the big institutions, he will perhaps give his notes a par value of $10,000 or even $100,000. He will give reasonable attention, also, to passing fashions or popular interests. In one year convertible bonds are much talked about and easily sold. In another year the popular interest is centered largely on industrial preferred shares. In another year there is an unreasoning aversion, let us say, to collateral trust bonds. Any successful dealer in securities will advise that these fashions and whims on the part of the investing public be not ignored.
In choosing forms of securities, unfamiliar financial devices are not usually favored unless they are brought forward by some individual or corporation with great prestige. The financial conditions at the time when the security is brought out must also be carefully considered. It has previously been suggested that short-term notes have been issued by railroad and other corporations in the United States in great quantities during recent years, partly because there is a public preference for such notes and partly also because it has been hoped from year to year that the world-wide financial depression would give way to a better market for long-term issues. The wisdom or unwisdom of this course need not be here considered. The point to be made here is that the large corporations have been consciously endeavoring to adjust their security issues to current conditions in the security market.
A striking example of very poor judgment in failing to make this adjustment is to be found in the history of the ill-fated Cordage combination. In April, 1893, the National Cordage Company had an inventory consisting of between $5,000,000 and $6,000,000 of binder twine, against which it had borrowed more than $5,000,000 from New York and Boston banks. While it was in this critical condition the crisis of 1893 became more and more threatening and some of the bankers notified the company that their loans must be at least in part repaid on maturity. On Friday, April, 28, 1893, the shares of the National Cordage Company were selling at excellent prices, the preferred at 103 3/4 and the common at 61, and the credit of the company was high. The following morning at a special meeting of the board, it was decided to take care of the demands of the banks by an immediate offer to the common shareholders of $2,500,000 of new preferred shares at pan This was equivalent to giving the common shareholders a privileged subscription of some slight value. Under ordinary conditions there would have been little doubt as to the success of this move. But the conditions were not ordinary. The action of the board was interpreted in the light of the general feeling of suspicion and uncertainty as to the soundness of all corporations. On the following Monday a bear party attacked the National Cordage Company's shares and the market price of the common fell below 50; two days later it had gone down to 36. Under these conditions it was, of course, out of the question to make a success out of the preferred stock issue. The banks became alarmed and demanded immediate and full repayment and the company suddenly collapsed. It was one of the most surprising and spectacular insolvencies that is to be found in the financial history of the country.*
Every possible measure should be taken to meet the convenience of prospective purchasers in putting out bond issues of large corporations which enjoy an international market; for example, it is customary and proper to make interest payable at the principal cities of the various countries in which the bonds are likely to be sold. There are a number of issues of this country the interest on which may be collected in Paris, London, Berlin, or New York.