Evening star., 1935-07-04
WEAK 1927 MOVE
F0RST.PAUL CITED
Depression and Series Of
Bad Harvests Bring Early
Return of Troubles.
BY CHARLES r. SPEARE.
SnecfaI nisna tch IN The star

0pcCidL DlbpdtCN 10 1uo otdI.
NEW YORK, July At is an old
story that the Interstate Commerce
Commission in 1927 agreed grudgingly
to the reorganization plan of the Chi
cago, Milwaukee g. St. Paul Railway
and let 1t 60 through as q matter Of
policy, while convinced 1t was unsound.
What 1t feared has come to pass soon
er than expected, having been forced
by the depression and a series Of bad
harvests in the territory of the system.
Probably the weakest feature of the
1927 reorganization was the creation
Of $l06, ,000, 900 of mortgage bonds and
about $183 ,000, 900 of convertible ad-
justments. The old Chicago, Mil
waukee & st. Paul general mortgage
issues, of which there are six series,
were not disturbed in the reorganiza-
ton. 1t is these bonds which, in the
tentative scheme Of adjustment of the
capital of the present Chicago. Mil
waukee, st. Paul g. Pacific Railroad,
are to have their interest scaled down
to two-thirds Of the contract amount,
the other third to be contingent on
earnings for a 10-year period.
Depends on Recovery.
II It happens that recovery comes
quickly and the full interest is earned
for any three years or for the last two
years in the five years beginning jan
uary /, 1886, or Is earned in any three
consecutive years after the first five
years, all of the interest becomes
fixed charge.
The convertible adjustment per
cent bonds were given to holders Of
junior issues of the old system. and
particularly to the investors in the
Puget Sound Division of the st. Paul
They became cumulative January /,
1880. In 1929 the full per cent had
been paid and the bonds had sold up
In the 70s. In April, 1880, semi-annual
interest Of 2la per cent was distrib-
uted, but the following October the
road had to squeeze its cash resources
to pay y per cent. This was the last
disbursement made on the adjust
ments. which enter the present era Of
reorganization with an accumulation
Of 26 per cent, or, roughly, s47, 900, 900.
These bonds were essentially specu-
lative. No one with his eyes open
would have bought them with any
other motive. In a little less degree
the general mortgage IS were specu-
lative. They had an equity position
which entitled them to q fair status
with those who believed that, in a
normal period, the ST. Paul could pull
through even though 1t had reorgan-
lied in 1927 on a basis that compelled
constant and liberal additions to sur
plus over fixed charges in order to
permit it to go through the inevitable
cycles Of traffic shrinkage.
Differs From c. n.
Unlike the Chicago and North
western, the st. Paul permanently
weakened its position by fastening on
to the old and well integrated system
in 1918, 2,000-mile extension from
the Missouri River to the Pacific
Coast. This was an adventure in
railroad building that should never
have been made, for there was no
need of third line paralleling the
Great Northern and the Northern
Pacific. The existence of it becomes
a matter Of deep reality now that the
st. Paul has, for the second time in
less than Is years, found itself unable
to meet its interest payments.
1t raises q question that Is upper
most in the minds of railroad creditors
today, and especially those who are
heavily involved in railroad securities
AS. for instance, the life insurance
ompanies-whether they shall pro-
coed along the former lines of reor-
ganization or accept the changes ap-
parent in the transportation industry
and make their plans for q new
capital set-up accordingly.
As stated above, the tentative plan
Of reorganization does not disturb
general mortgage bonds. 1t provides
for payment of the equipment trust
notes and certificates. The latter are
to be extended and paid of annually
in the amount Of 20 per cent of the
principal figure. The $l06,395 900 q
per cent mortgage bonds will be
exchanged for S per cent income
bonds. thereby becoming a contingent
rather than q fixed charge and re-
lieving the company of a $500, 900
annual liability in the event that
earnings do no0 improve. The $780,
$4,000 of adjustment per cent
bonds, with their rs per cent cumula-
tive interest, are to be converted
into per cent non-cumulative pre-
ferred stock, with $25 par value, and