Evening star., 1932-10-08
CREDIT HELD VITAL |
TO RAIL RECOVERY
Restoration of Financial
Structure to Normal Basis
Is Present Aim.
BY CHARLES F. SPEARE.

Special Dispatch to The Star.
NEW YORK, October 8.-The major
problem of the railroads is that Of
credit and how this may be restored
The restoration of credit obviously has
to do with a recovery in gross earn
ings, as well as with the introduction
Of economies-through consolidation,
for instapce-that will leave a larger
margin of net profit and provide a sat-
isfactory return on property invest
ment.
There are other factors in the credit
phase of the situation, however, that
should be recognized and forcibly dealt
with.
The greatest of these is the present
weight of a mass of junior bonds on
the capital structure of the railroads.
Many of these were issued when the
carriers had the field of transporta-
tion to themselves. Now there is com
petition by highway, by water, by pipe
lines and by air. 1t has permanently
robbed the railroads OF revenue traffic
amounting to hundreds of millions of
dollars year. Still tney have a plant
that was expensive to develop. which
has to be maintained and on which the
carrying charges continue.
Little Mileage Built.
It is a well known fact that little
railroad mileage is being built. Be-
tween 1922 and 1926 inclusive, the rail-
roads ordered over 10000 locomotives
to 1881, inclusive, their orders were
1924 engines and 29l 900 cars. In the
first eight months OF 1882 they con-
tracted for just / locomotive and
fewer than 400 cars. This clearly
Illustrates the state of their credit and
the sufficiency of their equipment for
present needs.
However, in the three years preceding
the panic the amount of railroad bonds
and notes issued was 81 1853 900, ,000 of
which over $1,000 100000 represented
new capital. In addition S275, 900
of stock was authorized. Since 1929
another ST 900 100000 in fixed debt has
been added to their obligations. An
analysis of the employment of this new
capital probably would indicate that a
considerable proportion went into un-
productive channels.
The holders of railroad mortgage
bonds that are a third and fourth lien
on properties, or debeEtures in effect or
name, must soon come to the reality of
a situation that has definitely changed
and which cannot, in the future, sup
port the present amount of annual fixed
charges. This means that bonded debt
must be scaled down or a substitution
of income bonds for fixed interest bonds
be made under voluntary agreements of
bondholders. Without some such ar
rangement. railroad credit will never be
in a healthy condition, and the invest
ments of individuals and institutions in
the lower classifications Of railroad OBJ
legations will be an unstable element in
their portfolios The operation is a
painful one. 1t cannot be avoided.
Junior Bonds.
Then there is the situation surround
ing a number of carriers that have been
mismanged and in recent years have
issued a large amount of Junior bonds
whose status today is questionable. The
effect of such securities on the credit OF
all other roads is the insidious one OF
a typhoid carrier moving about among
healthy people and spreading its germs
of what may be fatal disease. For
such roads there seems to be no other
recourse than recetvership or reorganl-
zation. The sooner this Is effected the
quicker 1t will clear the air IN the rail-
road investment market. The writer
does not share in the opinion that draS-
tic readjustments that must be made
in circumstances of this sort, where
there is no future prospect OF full
credit recovery. need affect the large
institutional holders of railroad Donds
adversely, considering the relatively
small amount of the specific bonds held
and the low proportion OF all OF their
railroad bonds to their total invest
ment For all American life insurance
companies In 1881 this was 16.2 per
cent. or only half that of the ratio OF
20 years ago.
It is essential that the bond structure
of the railroads be made as lmpreg-
nable as possible, as it will be necessary
for the carriers to do the major portion
of their new financing in the next 1e"
wears with additional bonds rather than
with stocks. This is an unfortunate
turn of events. 1t is one that must De
accepted. The recovery in the payment
of railroad dividends will be slow. Un-
iii railroads can earn sufficient to show
nrofits for their shareholders and have
their common or capital stocks well
above par. they may not, under present
rulings. sell additional stock. Inc
average stockholder is unwilling TO SUP,
scribe to new stock unless 1t Is quoteo
AT fair premium over par.
fropvricht 1927