A like insistence on the part of the bankers also accounts for the fact that corporations do not oftener create mortgages authorizing the issue of more bonds than they require for im mediate purposes. Suppose a corporation has assets worth $2,000,000, and bonds outstand ing to the amount of $1,000,000. The claim of the bondholders amounts to only 50 per cent of the value of the property on which they can enforce it. If the corporation has $2,000,000 bonds authorized under the mortgage, and now issues the other $1,000,000 at par, the assets rise to $3,000,000, to be sure, but the claim of the bondholders now amounts to 661 per cent of their value. Besides vitiat ing the security, additional authorized bonds coming into the market in this way tend to depress prices below the point representing the difference they cause in the strength of the security. These considerations explain why corporations do not oftener have " authorized bonds" ready to finance expansions.
It may be, however, that if the corporation has bonds outstanding they are not secured by a blanket mortgage. If in such circumstances it wants to finance an expansion it can create a new first mortgage covering the new assets. When corporations have closed but not blan ket mortgages, they most frequently finance an extension on bonds called "first and con solidated mortgage," or "first and refunding," or some similar name. All mean the same thing, namely, that, since the existing mort gage is not of the " blanket " variety, the cor poration can place a first mortgage on the new property. Instead, however, of limiting the authorized issue under the new mortgage to just the amount needed for the extension, the shareholders, at the request of the di rectors, probably authorize an amount equal to the existing bonds and enough more to finance the extension. The mortgage stipu lates, however, that an amount of these new bonds equal to the old outstanding bonds can be issued only to refund the old bonds. Al though it may be made possible, so far as the new mortgage is concerned, to use the new bonds at any time to retire the old, ordinarily those in control of the affairs of the corpora tion have no intention or expectation of retir ing the old bonds before they fall due. When the old bonds do mature, the corporation managers will simply replace them with the authorized and unissued bonds under the new mortgage. Until that time the new bonds will be a first mortgage on the new property and a second mortgage on the old.
New bonds issued under such a "first and refunding mortgage" may vastly exceed the amount needed for the new construction and the proceeds go to meet other requirements of the corporation. Often, indeed, the bonds have the security of a first mortgage on only an insignificant amount of property, just enough to permit the corporation to use the term "first mortgage" in the title of the bonds. Investors like the sound of "first
mortgage." It stands for everything safe. " Second mortgage " sounds abhorrent. When the bankers of the corporation arrange for a new issue they avoid it and substitute some euphemism. So far as names go, one would hardly guess that second mortgages exist in corporation finance.
Occasionally, if the security has come down from early days, its title confesses the remote ness of the lien. Outstanding bonds of the Erie Railroad, for example, run up to an acknowledged fifth mortgage before they begin to get the word " first " into the title of remoter securities. Its capitalization pre sents: $2,482,000 New York and Erie Railroad first mortgage 4s, 1937; a first mortgage on the main line from Piermont to Dunkirk, 446.78 miles.
$2,149,000 New York and Erie Railroad second mortgage 5s, 1919; a second mort gage on the same mileage.
$4,617,000 New York and Erie Railroad third mortgage 41s, 1923; a third mort gage on the same mileage.
$2,926,000 New York and Erie Railroad fourth mortgage 5s, 1920; a fourth mort gage on the same mileage, and besides a first mortgage on the branch from Graycourt to Newburgh, New York, 18.73 miles. (It seems decidedly odd to-day that the bankers missed the op portunity to call this a "first and" some thing mortgage.) $709,500 New York and Erie Railroad fifth mortgage 4s, 1928; a fifth mortgage on the main mileage and a second on the Newburgh branch.
Apparently the period of unsophistication ended when the road changed from the New York and Erie Railroad to the Erie Railway, for the next and sixth mortgage issue becomes the ($16,891,000) Erie Railway first consoli dated mortgage 7s, 1920.
However true that this is the first consoli dated mortgage, it is not a first mortgage on anything. After this issue comes the $80,342, 000 Erie Railway first consolidated 4s, 1996, which "get by" apparently because, though not the first consolidated issue of the road, they are the first consolidated issue to bear interest at the rate of 4 per cent. When the Erie changed from the Erie Railway to the Erie Railroad, and came to issue an eighth mortgage, it put out the ($22,000,000) Erie Railroad general mortgage convertible 4s, 1953. Acting on the principle under which the bankers had named the two preceding issues, this should carry the name first general mort gage. Apparently, however, the idea of breadth of lien serves sufficiently to indicate strength without any attempt to draw atten tion away from the altitude, or distance above the ground, of the security. We took the Erie for discussion nearly by chance. Almost any large railroad system would afford examples of such rather blind names.