Bondholder

“ A bondholder of a corporation runs less risk than a stockholder, first, as to interest: the corporation is obliged to pay interest on its bonds, but may at its own pleasure pass its dividends; secondly, the bondholder is a creditor, while the stockholder of the corporation is the debtor. On the other hand, if a concern is very successful, a shareholder may receive large dividends, while the bondholder receives only the stipulated interest. A bond is evidence of debt, specifying the interest, and stating when the principal shall be paid ”

“ As a bondholder, if he held enough bonds, he might even have more influence on the affairs of the corporation than as a stockholder. The market is moved by other forces than the legal distinctions in corporate contracts! And market facts are not necessarily correctly told by the accountant's categories either. I shall trouble myself little, in what follows, with the juridical and accountancy problems of credit, save in so far as these bear directly on the more pertinent economic aspects of the matter. ”

“ A bondholder's sufficient financial interest may be even more attenuated, since any recovery by the issuer will increase the value of the bond only because the issuer may become a slightly better credit risk. ”

“ This they would probably call a fair divide. The bondholder would receive an advantage in the increased premium of, say, $25,000,000, and the national bank would be able to make about double on its investment what it does now. ”

“ The general laws of value, then, apply in the case of credit phenomena. We find nothing unique in essence in them. The juridical relations, also, in so far as they have economic significance, shade into one another. To buy a bond from a bondholder is purchase and sale. ”

“ These bondholders have a common interest in this security, and are all equally entitled to the benefit of it; and in case of a deficiency of the fund to satisfy the whole of the debt, in equity, a distribution is made among the holders pro rata. The payment of the bonds of the second issue are also postponed until satisfaction of the issue comprehended within the first mortgage, as the second was taken with a full knowledge of the first. ”

“ General mortgage and first, second, and third preference bonds were to be entitled to subscribe to the amount of 10 per cent of their holdings; deferred income bonds to 4 per cent; and stockholders to 24 per cent; while besides the $22,000,000 mentioned, $2,000,000 additional bonds were to be issued each year for working capital and for the acquisition of real and personal property. General mortgage bondholders were to fund their coupons to and including January 1, 1898, and to receive an equivalent amount of coupon trust certificates. ”

“ At the present time a mortgage securing the payment of corporate bonds is usually placed in the hands of a trustee—generally some trust company—which is supposed to act in behalf of the bondholders as a unit and which is empowered by the language of the bond, in the event of the failure of the corporation to perform the obligations it assumes in said bond, to foreclose the mortgage and divide the proceeds of sale among the bondholders.—Carroll. ”

“ They are as much entitled to use their bonds in payment as any other bondholders are. It is their misfortune if they have not as many bonds as others have. They have no equity to cast their misfortune upon those who own more bonds than they do. Permission to bondholders who are mortgagees to purchase at a sale of the mortgaged property and to pay by their bonds is not only usual, but it is highly advantageous to all persons who have an interest. It tends to enhance the price which may be obtained, and thus benefits other creditors as well as the mortgaggor. ”

“ To carry out these intentions a majority of the bondholders was empowered to act controllingly for the entire body, in matters respecting the purchase and disposition of the property purchased, subject to the limitation that the purchase, if made by the trustee, should be for the use and benefit of the outstanding bonds; that the property should be conveyed to a new company which should be organized for their benefit, on such terms, conditions, and limitations as the holders of a majority of the outstanding bonds should request or direct. ”

“ Assuming that the extension of the maturity of the bonds in the instant case was binding on the creditor, we do not rest this case upon the fact that the sale was made before maturity or that the seller may have received valid consideration for a total release of his claim because the debtor's payment was made before maturity. It is quite possible that a bondholder might make a gift of an entire bond to anyone, including the maker of it. ”

“ It is customary for it to authenticate each bond issued subject to the provisions of the mortgage, to represent the bondholders in case of default, and to exercise such other functions as may be provided in the mortgage.
A generation ago it was customary for a railroad to name one or more individuals as trustees of the mortgages executed to secure bond issues. The development of trust companies and their manifest advantages over individuals in such a capacity has resulted in their absorbing almost all this business. ”

“ As the country grew in size, the large corporations—the railroads, for example—required greater capital in order to provide facilities for the handling of their growing business. It was impossible to provide this capital wholly by means of bond issues without destroying the proportion between bonds and stocks, which alone could give to the bondholders the protection of a substantial equity. ”

“ The stockholders, as owners of the road, have the entire control of the property, and the bondholders have no voice in the management so long as their interest is paid. This condition, corresponding to that of the owners and mortgagees of real estate, is entirely reasonable as long as the actual investments in stock and bonds maintain normal proportions, for the reason that the stockholders assume all the risk, while the bondholders are practically secured. ”

“ The fact that their face value is expressed in money sets very definite limits to their prices.*12 If, because of a doubling in the quantity of money, the value and profits of a railroad measured in money were doubled, the bondholder could not, on that account, realize more money for his bond. The value of the bond is not greatly affected by the valuation and profits of the railroad, so long as these are sufficient to guarantee the bond. The bond is an agreement to pay stated sums at stated times. It represents a limited money value carved out of the road. ”

“ There is another reason why the failure to ascertain what assets are subject to the payment of the Union and Consumers bonds is fatal. There is a question raised as to the fairness of the plan as respects the bondholders inter sese. While the total mortgage debt of Consumers is less than that of Union, the net income of the new company, as we have seen, [25] is to be divided into two equal parts, one to service the new securities issued to Consumers bondholders, the other to service those issued to Union bondholders. ”

“ It is this use of preferred stock and income bonds which makes it possible to realize the last and highly important rule which the engineers of exchanges have in mind. Only by the combined use of securities upon which payment of interest is optional with securities upon which payment is obligatory can the claims which their corporations are forced to meet be reduced, while at the same time former bondholders are given the chance to share in future prosperity. ”

“ Under such circumstances, it cannot be maintained, against the first mortgage bondholders, that a balance of such a running account of five years' duration represents money so applied to the current expenses of the road, or so diverted therefrom to the payment of interest on the bonds, as to carry with it a superior equity for repayment. ”

“ That large bondholders have an advantage over small ones, in that they are required to pay less in money, may be true; but it is an advantage they purchased when they obtained their bonds, of which it would be inequitable to deprive them. ”

“ If it's known that you're picking up the stock, every fellow that has any will soak you good and hard before he parts with it. Now, there are the bondholders—"
"Well, what can the bondholders do?" demanded Porter.
"Oh, get a receiver and have a lot of fun. You may expect that at any time, too. Those Eastern fellows are slow sometimes, but they generally know what they're about." ”

“ The general result of this system of financiering has been to deprive the legitimate original investors of their chances of making a fair return out of their investment. As a rule, the bondholders have provided all the capital expended, and the stockholders have invested nothing. The bondholders incur all the risks; the stockholders have no responsibilities. ”

“ The consequences of a different ruling would not only destroy the credit of the company, but might be disastrous to the bondholders, the value of whose investment would depend very largely upon the lengh of time the bonds were to run. ”

“ That the known bondholders, mortgagees, and other security holders owning or holding 1 per cent or more of the total amount of bonds, mortgages, or other securities are: (If there are none, so state.) ”

“ But every one of us who holds a policy in a life insurance company, or whose house or furniture is insured against fire, or who has a deposit in a bank or savings institution, or who has a national-bank note in his pocket is as much interested in the value of our National bonds and in a certain sense as much a bond holder as the owner of a bond himself; for if the value of the bonds is attacked and impaired the security of your investment goes, to that extent, by the board. ”

“ Holders of preferred stock have some preferment such as drawing a definite fixed rate of interest while common stock receives no dividends until the interest on the preferred stock is paid.
Corporations may also raise money by selling bonds. These are certificates of indebtedness, bearing a fixed rate of interest, payable at definite fixed periods. Like other [347] bonds they may be either sinking-fund, serial or annuity. Bonds differ from stocks in that their owners have no voice in the affairs of the corporation. ”

“ We have now upon the market stocks and bonds representing all conceivable kinds of property. Not only are properties of many kinds used to issue bonds upon, but many kinds of bonds are often issued upon the same property. Thus we find among our railroads not only first, second, and third mortgage bonds, but income bonds, dividend bonds, convertible bonds, consolidated bonds, redemption bonds, renewal bonds, sinking-fund bonds, collateral trust bonds, equipment bonds, etc., until they lap and overlap in seemingly endless confusion. ”

“ The manner of raising capital is largely a matter of credit, expediency, and the question of fixed operating expenses. It rarely happens that bonds carry with them the privilege of voice in the management of the corporation’s affairs; that is usually limited strictly to the shareholders. Accordingly, the issue of bonds instead of additional stock does not interfere with the management or control of the concern—so long as the contract requirements of the bond issue are adhered to. ”

“ But on the other hand, if 4 per cent, bonds are selling at par and he chooses a 4 per cent, loan, he gets his $1,000 in cash for his Pfandbrief and pays $40 per year interest and gives his mortgage and note for $1,000. It is always regarded as the best policy for the borrower to choose the class of bonds selling nearest par, unless they are selling above par, in which case the farmer securing the loan gets a premium over and above the amount of his liability and it is to his advantage to take such loans. ”

“ Article 7 Funds for redemption and interest payments of the Bond shall be put on allocation on an annual basis in the national general budget, and shall be appropriated to the managing bank in advance to be held on deposit in preparation for payment. Article 8 The offering and sale and the principal and interest payments of the Bond shall be managed by the Central Bank. Article 9 The Bond may be freely traded, pledged, or used as guarantee in official dealings, and may serve as guarantee reserve of financial enterprises. Article 10 Interest on the Bond is exempt from income tax. ”

“ That is to say, we will suppose that the Republic will take 85 for the price of its bonds, which are to carry 5 per cent. interest, to be secured by a lien on the customs receipts, and to be redeemed in thirty years' time by a cumulative Sinking Fund working by annual drawings at par, or by purchase in the market if the bonds can be bought below par. If the Republic's existing 5 per cent. bonds stand, let us say, at 98 in the market, this gives the issuing house a good prospect of being able to sell the new ones easily at 95, and so it has a 10 per cent. ”

“ Of our Government bonds, there are very few that do not bear date long after 1873. Many of them were sold for the express purpose of bringing gold into the Treasury. Our corporation bonds, are, as a rule, also quite young. But all these obligations are a mere trifle compared with the immense sums of debt contracted in the daily transactions of business. The average life of a real estate mortgage is only five years. ”

“ In fact, every banking association is assumed to be a corporation of money lenders. Under ordinary circumstances this corporation is able to loan to individuals whose credit is good all of its capital not otherwise employed in the machinery of the bank, a considerable portion of deposits from its customers, and to a certain extent its own credit in the commercial world. In the case of a national bank a portion of capital is loaned to the government in the purchase of bonds, which are the basis of its circulating notes. ”