New-York tribune., 1920-03-01
Are Railroad Bonds
A Good Speculation? /?
Where They Stand and What the Prospect for
Them Is in the New transportation Era
which Begins To-day Under Private Operation

compared with per cent before the
war. Aside from technical market con-
ditions, the fluctuations of these bonds
represent tho changes in interest
rates. IT the peak Of interest rates
has been reached it is logical to as
sumo that these bonds have touched
The bottom. But some authorities pre-
diet that interest rates will soar
higher.
Second, there are the junior obliga-
tions OF the companies of good credit.
These bonds sell to yield 6h per cent
and more, and are by some considere!
other hand, many prefer the third class
10 the second. Both have Speculative
features.
Third, there are the we'll secured
mortgage bonds of the companies of
relatively poor credit. Bankers say
that the buyer of these bonds must |
merely know that the physical value
OF the railroad is we'll in excess of the |
amount of the bond. If the worst hap
pens, they point out, the owners of the |
closed first mortgage bonds can take
tercsts are not fully protected by the
Junior interests. Those who argue |
that these bonds are better than the |
junior obligations of the roads of good
credit declare that the success Of
railroad depends on management, and
that over long period during which
the bond lives the character of The
management may change for better or
tor worse, and the holder of Junior
obligations who originally paid for
the fact that the management of the
company was good will have lost out to
some extent if new and inferior
ina 70
later in its history. On the other
hand, provided that the property
value we'll exceeds the size of the
mortgage bonds, they argue that the
holders of such obligations are we'll
protected. Bonds of this character
yleld TOR the most part from 6la per
cent to per cent, and fuctuate not
only with interest rates, but also in
accordance with the earning power and
hence the credit of the railroads. IF
the new railroad regime means that
the credit of these lesser roads will
become excellent, these bonds, bankers
believe, will have q sharp rise in value
The More Speculative Bonds
Fourth-The junior obligations of the
roads of poor credit. Whereas the
ponds Of the foregoing classes are con-
sldered more investments than specu-
latlons, this fourth class comprises
nonds that are essentially speculations
with investment possibilities. These
bonds are selling extremely low and
oher the opportunity of great rise,
provided everything that is good hap
pens TO roads OF this character. They
appeal to the optimist about future
railroad conditions and entail the
largest risks. Careful investment
houses do not recommend them for
PRIME investment, although they recog-
nlze they have speculative allurements.
Among railroad bankers there is a
feeling that the outstanding securities
Of the railroads will be more benefited
by the new conditions than the credit
OF the roads for financing new REQUIRE
ments. They estimate the new fnan.
clal needs Of the roads, which must buy
equipment and make up deferred main |
tenance, at $1,000, 100000 within the
next two years, and are frankly wor-
ried as to how the money is to be
raised in the present Investment mar
ket. which has been narrowed by the
unwtliingness OF men of great wealth
to buy taxable bonds under present
taxation Bankers recognize, too, that
the railroads ought to finance part of
their their new new needs through stock hota-
tons, lest their financial structure be-
come topheavy. But before placing
their money in new lrailroad securities /
investors will want to see demonstra-
ton of healthy earning power under
adequate rates. The fate of the indi-
vidual roads will be interminata until /
the Interstate Commerce Commission
actually begins to administer new leg
slation.
In bond circles one frequently hears
it said that railroad bonds are now a
buy, and some venture to predict
heightened activity in these securities.
Bankers contend that the property
value Of. the railroads is more than (
$1,000 100000 in excess of all the out
standing stocks and bonds, and that the /
replacement value of the properties
would be at least double the captaliza- |
ton. The notion of watered rail Sc
curities, they contend, is an historical
relic.
On this question Samuel Rea, presi- |
dent of the Pennsylvania Railroad, has
said:
"On December 81, 1917. the mar value