It should be noted that our hypothetical plan does not reduce the par of the new secur ities to be distributed to the old bondholders, but, in order to render more palatable the adulteration of the security of the bond holder, the plan even increases the par value of the new securities offered to him. Though part of the new securities is in stock, and the possibility of income return is the only thing of importance, the investor's mind, never theless, clings to par values, and the old security-holder does not feel such a sense of loss if the par of his holdings remains unim paired.
In our hypothetical reorganization we have had the cash requirements supplied by the bankers and the old stockholders. These sources would be possible in such a case as presented, largely because the earning power of the railroads, even at its low ebb, was still almost sufficient to meet the interest re quirements. Under those circumstances, as already pointed out, stock would have a spec ulative value. On that basis old stockholders will come forward with some funds. The new bonds, so greatly reduced in amount from those in default, have so substantial a value as to be marketable. To be sure, they will sell at a discount, but that is because the interest rate is made so low, 4 per cent. Though it would more normally be 5, the 4 per cent rate was decided on in order to allow so substantial a par value to be offered as to placate the old bondholders, and still sub stantially cut down the fixed charges. If the financial condition of the corporation had been worse, the burden of supplying new cash might have been thrust upon the bondhold ers. They would have to supply it in order to prevent the property from going entirely to wreck. Depending upon conditions, any class of security-holders may be asked to sup ply cash, even those holding the current debt of the corporation. Calling on the bond holder to contribute new cash is found to be unpopular. He is certain to have some of the feeling of "throwing good money after bad." Stockholders contribute any part of the new funds only under the strongest inducement. Though the contribution is for them also a throwing of good money after bad, they are reluctant utterly to part even with the "bad" money. Bondholders can be made to contrib ute only when their position comes to approx imate that which shareholders are usually in: they must contribute some or lose all.
Indeed, though the general procedure of one reorganization is much the same as that of another, the financial plans present very wide variations depending on the particular conditions of each case. Rather than follow through an actual reorganization which would present many problems of detail that might confuse one considering the subject for the first time, we have taken an imaginary case which we could make as simple as we chose. It should not be understood that the hypo thetical case presented is even typical. The elements were chosen to show the situation as simply as possible.
Our imaginary case does not present one often very important situation, that of the lease. If a reorganization involves an enter prise with leased property, those in charge of the reorganization must come to terms with the owners of the leased property. Of course, they may not consider it desirable to retain the leased property in the enterprise. The receiver may already have exercised his right to disaffirm the lease and cut this part of the property loose, or it may otherwise be cut loose in the course of the reorganization. Since it is not owned by the corporation undergoing reorganization, it does not form part of the property in the foreclosure sale. Generally the owners of the leased property do not want it back on their hands to operate. They have no operating organization. So they are likely to make terms, if they can, in the reorganization. Frequently the making of terms results in changing the status of the property from its former lease to an actual ownership. The leased property is consoli dated into the reorganized enterprise. Some times, but not usually, an arrangement is made reducing the rental. The whole matter is part of the general problem of reducing fixed charges. The lease be in so strong a position as to be undisturbed, like the un derlying bonds. It may be so weak that it is not desired at all, and can be cut off even more effectively than the stockholders' equity. Or it may be strategically in the position of the bonds in default, and have to suffer a scaling down in some way.