cates increases as each instalment is paid in spite of the depreciation of the equipment. In other words, the railroad obligates itself to pay off its certificates more rapidly than the security behind them declines in value. Herein, as was said before, lies the strength of equipment issues. The second inference is that the obligations have least strength, from the point of view of equity, immediately after their issue; and those that mature late have a constantly increasing strength the longer they are outstanding. The strongest equipment obligations obtainable are those of the last instalments of some old series purchased a year or so before its maturity. The figures given in the preceding table show too, that an issue of equipment obligations having more than ten years to run, or one that is paid off in more than ten annual instalments, or is issued for the full value of the equipments does not in itself afford substantial security. It is true that some of the roads with very strong credit issue securities of this sort that are called equipment obligations, but these, in reality, rest much more on the credit of the road than on the equity behind the equipment."1

41 All the equipment obligations of the Pennsylvania Railroad are of this class, because issued for an amount equal to the total cost of the equipment. So also are the series A, B, and C of Chicago & Northwestern Railway. The four great equipment trusts of the New York Central lines are of this class because they mature in fifteen rather than ten years. That of 1913 is a conspicuous variation from type in that it is an "open end" mortgage. So also is the single issue of Delaware and Hudson equipment bonds in that it is protected by a sinking fund rather than instalment payments.

The Buffalo, Rochester and Pittsburgh Equipment Trusts (series A, B, C) broke most of the canons in that they were issued for the actual value of the equipment purchased, ran for 20 years, carried a sinking fund of 5 per cent to 6 per cent, which could be invested in other equipment provided the obligations were not purchasable at par.

A practical illustration of the necessity of insisting that the equipment obligations shall be issued in strict conformity to established practice is that of the Wheeling and Lake Erie Railroad 5 per cent equipment bonds, issued in 1902 and payable in instalments of different amounts until 1922. They were therefore irregular in having double the life established by conservative practice. A receiver for the road was appointed in 1908. He continued to meet the sinking fund instalments until January 1, 1915, when he defaulted, and on July 1, 1915, defaulted on the interest. In the spring of 1916, the time at which the previous comparisons were made, the road's underlying first mortgage bonds commanded a 4.92 per cent credit, notwithstanding the receivership. In a previous note it was pointed out that ordinarily the value of equipment obligations is affected but little by receivership. Yet, in this case the certificates yet unpaid declined to only 60 per cent of par, at which price they were selling on a 15 per cent basis-provided one assumed their payment at ma

It is quite common for the railroad using the equipment to guarantee the car trust certificates covering the equipment it leases. Almost all ordinary equipment bonds issued under the New York plan are guaranteed, although it is questionable whether or not this adds to their fundamental security. When the issue is irregular in some conspicuous respect it is almost always guaranteed by the operating road. Likewise when an equipment trust is created for one or more small subsidiaries it is usually guaranteed by the parent.*2 In some cases, the notes are guaranteed by the manufacturing company from which the equipment was purchased.13 Frequently the entire issue is subject to redemption by the railroad company," and sometimes the equipment may be withdrawn from time to time.15 Very rarely the equipment security is reinforced by the deposit of bonds with the trustee.16

The final test of any security is its position in case of the failure of the enterprise on whose credit it is issued." Judged by this test, equipment obligations are among the strongest, if not the strongest turity. Owing to the long period during which the road had been paying for the equipment, the value of the rolling stock had declined to less than the face value of the outstanding certificates; hence the receivers might regard the payment of the certificates as of doubtful expediency. See note 55 for outline of final settlement.

42 The four great issues of the New York Central lines are guaranteed principle and interest by the New York Central & Hudson River, the Lake Shore & Michigan Southern, the Michigan Central, the "Big Four," the Pittsburgh & Lake Erie, and the Toledo & Ohio Central railroads.

The Trinity & Brazos Valley Railway, Equipment Trust, Series A, are guaranteed, principle and interest, by two independent corporations, the Rock Island and the Colorado & Southern roads.

43 The equipment notes of the Denver, Northwestern and Pacific Railroad of 1910 are guaranteed by the American Locomotive Company through endorsement on each note; those of the St. Louis and San Francisco Railroad (Series L, 1907) by the American Car and Foundry Company. An extreme case is where an equipment issue of a small road is guaranteed by the interests behind it. (St. Louis, Troy and Eastern, issue of June 1, 1915.)

44 Of the three hundred odd issues outstanding January 1, 1917, 56 or about 25 per cent were subject to redemption. The premium varies from 1 per cent to 22 per cent.

45 An old issue of the Michigan Central, of 1906.

46 Mexican Central Railway Company equipment and collateral bonds, First and Second Series, are sporadic cases of this. Reading equipment 4% per cent bonds of 1901, additionally secured by the deposit of $833,000 Philadelphia and Reading general 4s.

47 A clear statement of this in an editorial in the Commercial and Financial Chronicle, vol. LXXII, p. 1296.

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form of corporate security. When they are issued according to the Philadelphia plan the courts have, almost without exception, considered the insolvent railroad only the lessor of the equipment, which is not therefore, covered by the bonds of the company," and of which the receiver does not become the trustee. Since the title never rested with the railroad corporation, and the property is movable, the real owner or the lessee has the power to take away the equipment if the railroad violates the contract under which the equipment obligations were issued. Knowing that the railroad cannot be operated without cars and locomotives and that it would be wasteful and inexpedient to sacrifice the equity remaining to the road, receivers have invariably continued the payments on the equipment trust interest and instalments. If necessary, receivers' certificates, taking priority over mortgage liens, have been authorized to meet these payments. Nevertheless, at the time of reorganization the holders of outstanding equipment obligations have, in a few rare cases, been asked to refund their securities on an advantageous basis;50 in still rarer cases they have been asked

48 The important case of the Toledo and Ohio Central is no exception to this rule. The certificates in this particular case were not issued under the Philadelphia plan in its unequivocal forms. Some of the equipment was made in the railroad's own shop, some of it was owned first by the railroad, used, and then transferred over to the trustee. So that the United States Supreme Court interpreted the lease as a mere subterfuge to emasculate the lien of the general bondholders of the railroad. This they condemned. See 146 U. S. 536.

49 The exceptions of temporary lapse-Denver and Rio Grande; Detroit Southern; Atlanta, Birmingham and Atlantic; Pere Marquette-are so exceptional as not to destroy the strength of the above statement.

50 The two cases of the refunding of equipment obligations are the Denver and Rio Grande reorganization of 1886 and the Norfolk and Western reorganization of 1896. The former involved an actual temporary, although not permanent, sacrifice, and will be discussed at length in the succeeding note.

The Norfolk and Western Railroad reorganization of 1896, although involving the refunding of certain equipment obligations did not imply even a temporary sacrifice. There were two classes of equipment obligations outstanding (see note 28); those issued under the Philadelphia plan were paid in money, whereas the equipment mortgage bonds were refunded. For each $1,000 in equipment mortgage 5 per cent bonds, the bondholder received $1,000 in new consolidated mortgage 4 per cent bonds and $480 in new preferred stock. He was compelled to undergo a sacrifice of 1 per cent in yearly income, but this was fully compensated for by the preferred stock bonus. Subsequently, with the success of the rejuvenated Norfolk and Western road, he had an increase in both income and principle.

In con

to undergo what would seem like permanent sacrifices.51 trast, however, to these rare exceptions, it may be said that in prac

51 The notable case is that of the Denver and Rio Grande reorganization of 1886. As this is the only instance in the history of American railway finance where the holders of equipment obligations issued under the Philadelphia plan were forced to suffer for a considerable period, the details are significant. The old Denver and Rio Grande had been built in the seventies, one of the numerous far-western lines built long before its construction could be said to be in any way an economic necessity. In the depression of 1883 and 1884 it failed. Disaster also overtook its western extension, the Denver and Rio Grande Western. At the time of the failure there existed a comparatively small issue of first mortgage bonds, the interest on which had been earned unquestionably. There were also approximately $3,500,000 6 per cent and 7 per cent equipment certificates on which the interest had not been fully earned. Besides this, there were two large issues of junior bonds and much worthless stock practically all owned in England and Holland. Some of the equipment had been used by the Denver and Rio Grande Western in a manner contrary to the spirit of the equipment trust. In the report of Pothonier and Parrish-an interesting example of a foreign report on one of our early, needless roads, built with foreign capital-it was stated: "It will be absolutely necessary to capitalize the rolling stock trusts on fair and equitable terms, or, failing this (the contracts being extinguished by foreclosure), to provide the necessary equipment on the basis of present low prices." (Paragraphs in report quoted Com. & Fin. Chron., vol. XL, p. 181.) The bonds of all issues, together with the stock, were largely held in England and Holland, but the equipment obligations were held mostly in Pennsylvania. Judge Hallett had ordered the payments of the principle of some of the equipment certificates postponed, and the holders had done little to object. Moreover, much of the equipment itself had been allowed to so depreciate as to have little more than scrap value. Some of the bondholders at the time contended that the reorganization committee could then, in the depression of 1885 and 1886, buy better secondhand equipment for less than the par value of the obligations outstanding. At all events the trustees of the car trusts feared being forced to liquidate on the equipment. All these circumstances combined to make the position of the equipment obligations conspicuously weak. It is true that a plan of reorganization was worked out in Philadelphia which involved the refunding of the equipment obligations into first mortgage bonds, but it was not acceptable to the foreign bondholders and its advocates dared not force the foreclosure of the car trusts.

In the reorganization, the small issue of underlying first mortgage bonds was not disturbed. The bondholders reorganization committee first offered the holders of the equipment obligations consolidated (junior) 4 per cent bonds involving a reduction of from 2 per cent to 3 per cent interest, and some preferred stock. Finally, after considerable haggling, they received 17 per cent in cash and 120 per cent in consolidated (junior) 4 per cent bonds for the remaining 83 per cent face value of their equipment certificates. (Total car trusts $3,476,000, cash payments $600,000.) The old 6 per cent car trust certificates received in addition 20 per cent in new 5 per cent non

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tically all of the reorganizations of American railroads, the equipment obligations were either paid in money53 or else assumed directly by the new corporation succeeding to the property of the old one. In only one instance in the recent history of railroad finance has a reorganization committee forced the holders of equipment obligations to accept a compromise and in this instance the bonds were issued under an unusual and weak agreement,55 and in cumulative preferred stock and the old 7 per cent car trust certificates 30 per cent in the same security.

This reorganization of the Denver and Rio Grande was in 1885 and 1886. The Atlanta, Birmingham and Atlantic, reorganized in 1916, had a similar financial structure-a small, strong, fully secured first mortgage issue, a large volume of equipment obligations and a host of junior bonds, notes and stocks. As in the earlier Denver and Rio Grande case, the first mortgage bonds were undisturbed, but in this later case the equipment obligations were practically all paid in money, although the whole mass of junior securities was obliterated, and even receivers certificates were refunded into income bonds. This difference in the treatment of equipment obligations in analogous situations in 1886 and 1916 indicates the almost impregnable position they now occupy.

52 Chamberlain gives a brief summary of some 28 cases of railway reorganization in practically all of which the holders of equipment obligations suffered no hardship (Principles of Bond Investment, p. 300). The Guaranty Trust Company also cites a long series of reorganizations in which the equipment obligations were undisturbed (Railway Equipment Obligations, p. 11).

53 A suggestive sentence bearing on this occurred in the analysis of various securities of the Missouri Pacific Railway issued by all the reorganization committees at the time of the receivership "$3,867,000 equipment obligations maturing to June 30, 1918: The equities in the equipment securing these obligations compel provision for their payment in cash." Analysis dated October 15, 1915, p. 3.

54 A combination of the methods is shown by the St. Louis and San Francisco reorganization plan. The equipment obligations maturing before July 1, 1917, have been paid in money from assessments on stockholders; sufficient prior lien (senior) bonds are reserved to refund those maturing after July 1, 1917, while in the meantime they are assumed by the new company.

55 This was the case of the Wheeling and Lake Erie “equipment sinking fund gold bonds," due 1922, described in note 41. They were unusual in running 20 years and in being liquidated through a sinking fund rather than through instalment payments. After the interest had been in default a year, at the time of the reorganization of the Wheeling and Lake Erie Railroad, the reorganization managers agreed to pay the back interest and to pay 35 per cent of the face of the outstanding certificates in cash and to give new 4 per cent "secured sinking fund equipment notes" for the remaining 65 per cent. These new notes are secured by the old unmatured equipment bonds, which in their turn are secured by the equity in the equipment. The reorganized company agrees to buy and cancel one sixth of the new notes each year until the entire issue is redeemed. Considering the weakness of the conditions under which the