This temporary financing, which was done in the hope of coming eventually into a more favorable mar ket, built up a mass of short-term obligations which required frequent refunding. The total note issue of the last ten years was as follows : Various remedies were proposed for this condition. The railroads demanded rate increases. The invest ment bankers suggested refunding with comprehen sive first-mortgage issues, the use of sinking fund pro visions in connection with future bond issues, and en larged powers for trustees in keeping track of such security as rolling stock. The shippers urged greater efficiency in operation.
6. Equipment rapid increase in the use of the equipment trust plan of buying cars and engines by American railroads has been seen during the past twenty-five years. There are three parties to the con tract—the railroad company, the equipment manu facturer and the trustee, the last named being usually a bank or trust company. According to one arrange ment the railroad company pays the trustee from ten to twenty per cent of the cost of the equipment and the balance is paid in notes divided as to maturity by an even schedule over a period of ten years. It also en ters into an agreement to lease the equipment, main tain it in repair and keep it free from all liens. The trust company buys the equipment from the manu facturer and delivers it to the railway according to the terms of lease. It markets the equipment trust bonds, collects rentals, presents bonds to the railway for payment when due, and performs all other duties in its relation between the railroad and the bondhold ers. The title to the equipment rests in the trustee. It is transferred to the railway when the last bond is paid. With such an arrangement as this in force, if there should be any deficiency in the security of the rolling stock, the railway would still be liable on its notes. To avoid taxation on the equipment trust is sues, some plans provide for the issue of certificates by the trustee, or by an association which assigns the lease to the trustee, and the railroad guarantees the certificates.
In all plans the main points have been to secure a cash contribution from the railroad to serve as an ini tial margin of safety, to have the notes or certificates paid off more rapidly than the rolling stock depreci ates so that the margin of safety increases as time goes on, to form an enforceable contract with the rail road with reference to repairs and the replacement of destroyed units, and to withhold title from the rail road until the equipment is entirely paid for, so that creditors of the railroad or the holders of general mortgage bonds cannot attach the property as secu rity for their claims.
These securities possess the enviable record of hav ing passed thru numerous receiverships without a dol lar of loss to any holder and with scarcely a recorded delay in interest payment. The courts have declared this security a preferred obligation and they have even ordered receivers to sell certificates to meet the re quired payments on interest and principal. The reason for such exceptional treatment is that rolling stock is absolutely essential to a railroad, and if there is a default the trustee possesses the right to remove the property from the possession of the road.
The quantity of equipment bonds outstanding in 1890 was $49,000,000. In 1900 it was $60,000,000. In 1905 it was $200,000,000. And in the latter part of 1915, it was $600,000,000.
A portion of the quotation sheet of railway equip ment bonds issued by Bull and Eldredge of New York on November 11, 1916, was as follows : Equipment bonds are frequently quoted on the basis of yield only. Where a number of maturities are grouped, this method gives the approximate aver age yield and the price is readily determined from this.