MODIFICATION OF RAILROAD FINANCIAL STRUCTURES WEDNESDAY, MAY 28, 1947 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON The subcommittee met at 10 a. m., pursuant to adjournment, in the committee room of the Committee on Interstate and Foreign Commerce, Capitol, Senator Clyde M. Reed (chairman of the subcommittee) presiding. Present: Senator Reed. Senator REED. The subcommittee will come to order. Mr. Fletcher, we will hear from you first this morning. STATEMENT OF ROBERT J. FLETCHER, GENERAL COUNSEL, BOSTON & MAINE RAILROAD, BOSTON, MASS. Mr. FLETCHER. Good morning, Senator. Senator REED. The Boston & Maine has an important situation. Will you please outline it. Mr. FLETCHER. I think that is the important part, just outlining the actual situation. I will not indulge in much argument then. Senator REED. All right. Mr. FLETCHER. My position on the bill, Senator, is exactly the same as Mr. Morfa's. We are advocating the same amendment, a suggested form of which is attached to my formal statement here. Senator REED. I may say to you as I said to Mr. Morfa yesterday, as far as I know, there is no objection on the part of the committee to accepting those amendments which will permit recognition of the stocks as well as the bonds. Mr. FLETCHER. That is correct, and that is what we chiefly advocate, of course, is expanding this bill so as to include stock as well as bonds in the provisions. If there is no objection, I will proceed with my statement. My name is Robert J. Fletcher and I am general counsel of the Boston & Maine Railroad, for whom I appear today. My address is 150 Causeway Street, Boston 14, Mass. The Boston & Maine Railroad is very much in favor of the proposed section 20b which S. 249 would add to the Interstate Commerce Act, and I appear here to advocate the enactment of this bill, especially with the amendments which we suggest. 203 (The amendments are as follows:) APPENDIX A AMENDMENTS Intended to be proposed by Mr. to the bill (S. 249) to amend the Interstate Commerce Act, as amended, and for other purposes, viz.: On page 2, line 4, insert after the word "Act," "to enhance the marketability of railroad securities impaired by large and continuing accumulations of interest on income bonds and dividends on preferred stock". Line 8, strike the word "obligations", and insert in lieu thereof the word "securities". Line 11, strike the word "obligations", and insert in lieu thereof the word "securities". Line 20, strike the word "obligations", and insert in lieu thereof the word "securities". On page 3, line 4, insert after the word "trust," the words "corporate charter, stock certificate,". Line 5, insert after the word "instrument" the words, "or any provision of state law". Line 11, strike the words "bonds, notes, debentures, or other evidences of indebtedness (whether secured, unsecured, matured, or unmatured) issued under any mortgage, indenture, deed of trust, or other instrument of like nature, such bonds, notes, debentures, or other evidences of indebtedness" and insert in lieu thereof, the words "securities as defined in section 20 a (2) of this part;". Line 16, strike the word "obligations", and insert in lieu thereof the word "securities". Line 17, after the word "trust," insert the words "corporate charter". Line 18, strike the word "obligations" and insert in lieu thereof the word "securities”. Line 20, after the word "secured" insert the words "(herei after referred to as instruments)". On page 4, line 15, strike the word "obligations" and insert in lieu thereof the word "securities". On page 5, line 5, after the word "section 20a," insert the words "not inconsistent with paragraph (1) of this section,". Line 22, strike the word "obligations" and insert the word "securities" in lieu thereof. On page 6, line 8, strike the word "obligations" and insert in lieu thereof the word "securities". Line 22, strike the word "obligation" and insert in lieu thereof the word "security". Line 25, strike the word "such". On page 7, line 5, strike the word "obligations" and insert in lieu thereof the word "securities". Line 8, strike the word "obligations" and insert in lieu thereof the word "securities". Line 11, strike the word "obligations" and insert in lieu thereof the word "securities". Line 12, strike the word "obligations" and insert in lieu thereof the word “securities". Line 16, strike the word “obligations" and insert in lieu thereof the word “securities”. Line 18, strike the word "obligations" and insert in lieu thereof the word "securities". Line 22, strike the word “obligations" and insert in lieu thereof the word "securities". Line 24, strike the word "obligation" and insert in lieu thereof the word "security". On page 8, line 6, strike the word "obligation" and insert in lieu thereof the word "security". Line 7, strike the word "obligation" and insert in lieu thereof the word "security". Line 8, strike the word "obligations" and insert in lieu thereof the word "securities". Line 12, strike the word "obligation" and insert in lieu thereof the word "security". Line 17, strike the word "obligation" and insert in lieu thereof the word "security". On page 9, line 9, strike the word "obligation" and insert in lieu thereof the word "security". Line 11, strike the words "an obligation" and insert in lieu thereof the words "a security". Line 18, strike the word "obligations" and insert in lieu thereof the word "securities". Line 19, strike the word word "obligations" and insert in lieu thereof the word "securities". Line 23, strike the word "obligations" and insert in lieu thereof the word "securities". On page 10, line 1, strike the word "obligations" and insert in lieu thereof the word "securities". Line 3, strike the word "obligations" and insert in lieu thereof the word "securities". Line 7, strike the word "obligations" and insert in lieu thereof the word "securities". Line 10, strike the word "obligations" and insert in lieu thereof the word "securities". Line 12, strike the word "obligations" and insert in lieu thereof the word "securities". On page 11, line 14, strike the word "obligation" and insert in lieu thereof the word "security". On page 12, line 2, strike the word "obligations" and insert in lieu thereof the word "securities". Line 3, after the word "trust," insert the words "corporate charter,". Line 7, after the word "trust", insert the words "corporate charter,". Mr. FLETCHER. These amendments will have the effect of expanding the scope of the bill so as to cover the voluntary reorganization of the stock structure of a railroad as well as the voluntary adjustment and modification of its debt, under the same conditions and with the same safeguards as are provided in the present draft with respect to modification of debt. The effect of the bill on the ability of railroads to avoid reorganization proceedings in the future and on the consequent strengthening of the credit of the railroads, as well as other benefits which will follow its enactment, as now written, have been dwelt on at length, both in committee hearings at the last session of Congress and at this present session. Accordingly, I see no need to go into the merits of the bill as now drafted. I think it is safe to say that it has the support of practically everyone connected with the railroad industry and of those who are large holders of railroad securities. The following remarks will, therefore, be confined to a discussion of the need, as we see it, of the expansion of the bill to cover stock as well as bonds and notes. This can best be illustrated in the case of the Boston & Maine Railroad by a brief review of its financial experiences in the last 30 years and a summary of the situation in which it finds itself today. In 1918 the railroad had outstanding two classes of stock, common and noncumulative preferred. It operated a great percentage of its railroad mileage under leases from various companies calling for the payment of annual rentals in very substantial amounts. The railroad was at the time in receivership. A plan was developed and carried through, becoming effective in 1919, under which a number of the lessor companies, including some of the most important, were merged into the Boston & Maine Railroad, and the leases of their properties were, for practical purposes, terminated. Five new issues of Boston & Maine stock were created, being denominated first preferred stock, classes A, B, C, D, and E. They carried the same liquidation rights but had different rates of dividends, all of which were cumulative. These classes of stock were distributed in accordance with the plan to the holders of the stocks of the leased lines which were merged into the Boston & Maine, on a share-for-share basis. At the same time the railroad executed a first mortgage on its properties and issued bonds thereunder, and, as a part of the plan, emerged from receivership. This left the railroad with first mortgage bonds, certain divisional mortgage bonds, since retired, and seven classes of stock outstanding. To carry out this plan, it was necessary to procure the enactment of special legislation in Maine, New Hampshire, and Massachusetts, the States in which the Boston & Maine was incorporated. As a result of the plan, a New York corporation was merged into the Boston & Maine Railroad and consequently the State of New York was added to the list of those States in which the railroad is now incorporated. That was entirely successful, but did result in a further complicating of the financial structure of the road. In 1925 the railroad was in need of large amounts of money for rehabilitation and improvement of the properties. After study of the situation it was determined that the money could be raised either by a bond issue or by the issuance of a new class of preferred stock which would take preference over all of the stock then outstanding, being 62410-47- -14 denominated prior preference stock. The latter course appeared to be preferable. The plan for the issuance of this stock was developed and carried through, under which nearly $23,000,000 par value of prior preference stock was eventually issued, carrying dividends at the rate of 7 percent per annum, fully cumulative. At the time of the issuance of the prior preference stock it was considered desirable to modify somewhat the rights of the holders of the other classes of stock. This could be done only with their assent, and it was accordingly necessary to obtain such assents from a large majority of such holders. A substantial degree of success was ob tained. Approximately 75.5 percent of the total first preferred stock outstanding, 95 percent of the preferred stock and 97.5 percent of the common stock, making a total of all stock then outstanding of approximately 87 percent, assented to the plan and the issuance of the prior preference stock. The assenters were required by the plan either to turn in certain amounts of their stock for cancellation or subscribe to certain amounts of the prior preference stock to be issued. The stock of the old classes of those assenting to the plan was stamped at this time to signify the change in rights of such shares. The non assenters retained their old stock in unstamped form. The stamped stock has certain additional rights, but also certain disadvantages, as compared with the unstamped shares. The result was that we ended up with what amounts to 15 classes of capital stock, 8 classes with different designations and 7 of which existed in both stamped and unstamped form. No two classes of those 15 have precisely the same rights, although of course some of them have very close to the same rights. At the same time, out of approximately 43% million dollars of bonds which were to mature either at that time or in the next few years, the maturity of approximately 40%1⁄2 million was extended by voluntary consent of the holders. The result of this voluntary readjustment of the capital structure was highly satisfactory at the moment from a financial standpoint and showed that it was possible to obtain the cooperation of a large percentage of the security holders of a railroad. At the same time, however, it left the capital structure of the railroad in a very involved condition. After completion of the plan, there were outstanding prior preference stock, five classes of first preferred stock, preferred stock and common stock, and all of these, except the prior preference, were outstanding in both stamped and unstamped form. This adds up to the astonishing total of 15 classes of stock, no two of which have precisely the same rights. This situation has existed up to the present time. As is well known, the railroads, as well as the rest of the country, were soon faced with a severe depression, including disastrous reductions in the amounts of traffic handled. This led eventually to the cessation of the payment of dividends on any class of stock, and no such dividends have been paid by the Boston and Maine Railroad since 1932. The resulting accumulations of dividends are tremendous and the situation as of December 31, 1946 is portrayed by the following table which shows both the amount of stock of each class outstanding and the unpaid dividends which have accumulated. In 1939 the Boston and Maine was again confronted with financial difficulties. A disastrous flood in 1936 and the hurricane in 1938 caused very extensive damage to the railroad's properties, which was repaired partly with the proceeds of secured notes sold to the RFC and to certain banks. These were about to mature. In addition, over $63,000,000 principal amount of first mortgage bonds were to mature during the next 5 years. It was evident that a major refinancing plan was necessary, and such a plan was developed and made effective by voluntary agreement in the middle of 1940. Under the terms of this plan, two new series of bonds were createdone, a new series under the existing first mortgage, as amended, denominated series RR, bearing fixed interest at 4 percent, and the other a series of income bonds under a new second mortgage, bearing interest at the rate of 4%1⁄2 percent if earned but cumulative only to the extent of interest at the rate of 4 percent. Series RR bonds were issued in payment of the secured notes in the amount of $19,623,000. Holders of the old first mortgage bonds were asked to exchange them for new securities. The rate of exchange for each $1,000 of old bonds was, at the option of the bondholder, either $500 in series RR bonds and $500 in income bonds, or $300 in cash, $200 in series RR bonds and $500 in income bonds. The plan was highly successful, the holders of 93.25 percent of the old bonds and the holders of all of the secured notes assenting to the exchange of securities. Most of the bondholders chose to take the cash option and series RR bonds in the amount of approximately $26,000,000 sold to the RFC to provide cash for this purpose. The old bonds of the nonassenters remained outstanding without change. After the refinancing was completed, the funded debt of the railroad consisted of a little over $6,000,000 of old first mortgage bonds which continued to be held by the nonassenters to the plan, about 67%1⁄2 million dollars of series RR first mortgage bonds, of which approximately $40,200,000 were held by the RFC, about $48,000,000 of income bonds, and approximately 3%1⁄2 million dollars of equipment obligations, making a total of $125,321,700 of funded debt. As part of the plan, it was agreed that sinking and capital funds would be set up and that no dividends would be declared on any stock until $25,000,000 of bonds had been retired. Since 1940, to and including |