After the case is fully before it — the ap praisals of the property and the representa tions of the various parties in interest — the court establishes an upset price that will provide a payment of seventy cents on the dollar to the depositing bondholders of both classes. Now, let us consider what cash requirements the reorganization committee will have to meet. The committee estimates that the expenses of reorganization will amount to $150,000. But this charge will be met directly by the depositing bondholders, and need not be considered here. There are $1,000,000 of undeposited general mortgage bonds. The committee will have to provide $700,000 to satisfy their claim. Of the col lateral trust bondholders, those owning $250, 000 of bonds did not deposit. Providing for them will take $175,000. There are $500, 000 of receiver's certificates outstanding and maturing so soon that their payment will have to be provided for, requiring $500,000 more in cash. Miscellaneous claims, such as judg ments for personal injuries, will take $100, 000. Immediate additional expenditures will have to be made on the property itself, for which the committee feels that it must pro vide $810,000. Recapitulating cash require ments, then, we have: — Two items in these cash requirements call for some comment. It is customary to bring the interest payments on the old bonds up to date, so that the security-holders may feel that they have had a complete, though in terrupted, income return. Of course, this is merely equivalent to making depositing bondholders a better offer by so much. The cash payment is especially good bait. The other item is the underwriting commission. We have already discussed the general princi ples of the formation of the underwriting syndicate. The financial backing may take the form of an underwriting or of an agree ment to purchase any part of the securities to be disposed of for cash which the old stock holders do not subscribe for. We have here assumed the underwriting.
In formulating reorganization plans, there fore, the committee faces the necessity of raising an immediate $2,545,000 in cash. Be sides raising this cash, it must also see to it that fixed charges are cut down to a point at which the net earnings will cover them with a sufficient margin to make another receiver ship improbable. Of course, the cutting of fixed charges had to be provided for before the committee knew just how much cash it would have to raise for the non-depositing bondholders, since the bondholders would have a right to withdraw on the announce ment of the plan, and possibly some more might come in at that time. Our committee met the situation in a thoroughgoing way. It decided to offer holders of bonds half the amount of their par in interest-bearing se curities, half the amount of their par in pre ferred stock, and to add to that a share of the new common stock for every $1000 bond. They decided, too, that the new bonds should bear interest at the rate of only 4 per cent, as against the 5 per cent on the old bonds, and that the new preferred stock should be cumu lative and entitled to preferential dividends of 6 per cent. The result would be that if the full dividend should be paid on the new pre ferred stock, the old security-holders would be getting the same income as before, and if anything should ever be paid on the new common stock, that would be so much extra. That is: Old security Interest on $1000 bond at 5 per cent $50 New securities Interest on $500 bond at 4 per cent 20 Dividend on $500 preferred stock of 6 per cent 30 $50 We have assumed that 95 per cent of the holders of the defaulted bonds deposited them, and indications were that as large an amount would be on deposit when the plan should be declared operative. So the com
mittee has to provide new securities for the owners of $19,000,000 of general mortgage 5's and for the owners of $4,750,000 collateral 5's. Since they are planning to give owners of each of these issues half their par value in new 4's, they will have to provide a total of $11,875,000 of the new 4's to meet this re quirement. An equal amount of new preferred stock will have to be provided to carry out the idea of the committee for the reorganization.
With the earnings of the corporation in sufficient or barely sufficient to cover the dividend requirements, the committee can hardly count on selling the new preferred stock to provide cash. So it must provide an issue of the new 4's sufficiently large so that some may be disposed of to furnish the ready money necessary. Since satisfying the old bondholders will require close to $12,000,000, and since the new bonds will not be worth par, the committee will have to plan for about $15,000,000 of the new bonds for immedi ate issuance. The committee feels the need, however, of looking forward to future cap ital requirements, and decides to make the authorized issue of the new 4's amount to $20,000,000. The additional $5,000,000 need not be considered in the immediate reorgani zation plans.
Let us see, now, what the fixed charges will be on the assumption that $15,000,000 of the new 4's are to be presently issued : — Interest on underlying bonds . $500,000 Interest on first 44's. 1,125,000 Interest on new 4's 600,000 $2,225,000 Against these prospective charges the cor poration net earnings now are $2,800,000. On this showing of an amount available to meet the interest requirements of the new 4's of $575,000 in excess of the $600,000 demanded, the new bonds have a substantial value. Let us assume that the market is such that if they are made to run for the term of twenty-five years, as the committee plans, they should sell at 85, or approximately a 5.05 basis.
The reorganization committee has to con sider the position of the preferred and com mon stockholders of the old corporation. In accordance with the principles already dis cussed, it wishes to give them an opportunity to participate in the reorganized enterprise and so forestall any endeavor on their part to block the reorganization, and at the same time to take advantage of the desire of such as may want to continue with the enterprise to raise part of the cash requirements. With a look toward this situation in particular and toward the rounding-out of the reorganiza tion plan in general, the committee decides that the capital stock of the new corpora tion shall be $20,000,000 of common stock, in addition to the $12,000,000 of preferred stock already considered. The committee decides to give the preferred stockholders of the old corporation an opportunity to partici pate in the reorganization by allowing them, for each share of the old stock they hold, to purchase, by the payment of $50, an amount of the par value of $50 of the new 4's and $100 of the new common stock. Since it is estimated that the new 4's should be worth 85, that would make that part of the pur chase which is the $50 in bonds have a value of $42.50, and therefore be equiva lent to letting the old preferred stockholder buy the new common stock for $7.50 a share.