Reorganization expenses are allocated di rectly to the depositors, and are not provided for in the cash requirements. Any security holder who has deposited and subsequently withdrawn will have to pay his pro rata of the expenses up to the time of his withdrawal. That would ordinarily be up to the time of the announcement of the plan of reorganiza tion. In an organization more complex than the one we have presented, the reorganization, committee would have to determine what proportion of the expenses each issue in volved in the reorganization would have to bear.
We have presented only one device for scaling down fixed charges, that is, by a sub stitution of stock in the place of interest bearing securities. This is the best method, but is not always followed. A plan more commonly adopted in earlier reorganizations than recently was the substitution of income bonds for bonds with less elastic interest provisions. The objectionable characteristics of income bonds were discussed in the first volume. In substance, from the standpoint of a security-holder in reorganization, income bonds give practically no greater assurance of payment of income than a preferred stock, and lack the voting power which helps the preferred stockholder protect his position.
The "adjustment bond" is 'another device resorted to in reorganizations to effect an immediate reduction in fixed charges. The reorganization committee may ask the old bondholders, whose securities carried interest, let us say, at 5 per cent, to take new bonds carrying interest for the first year say of 2 per cent, for the second year of 3 per cent, for the third year of 4 per cent, and the fourth year reaching the interest return of the replaced securities of 5 per cent. - Though these rates involve an immediate cutting-down of the bondholder's income, they include a definite and absolute promise that the income will be restored by the steps indicated. This places the security-holder in a stronger position than the expectancy of income offered by a pre ferred stock. From the standpoint of the
probable permanency of the reorganization it is not so good as the preferred stock. If the reorganization committee relies upon it to effect the entire scaling down and does not materially reduce the principal amount, fixed charges will go back to their original amount at the end of the four-year period. Since the committee is not likely to get the bondholders to accept a reduction of both principal and rate of income, the principal amount will probably remain unimpaired. The adoption of the device of the adjustment bond indi cates a reliance on increasing earnings. If this expectation should not be realized, the corporation would again face reorganization.
For the reorganization plan we have fol lowed through, we have had the reorganiza tion managers assume the burden of the work of effecting the purchase and of distributing the securities. The position of the under writing syndicate involved only the taking-up of such of the securities provided for the rais ing of cash as the old stockholders did not subscribe for. After formulating the new financial plan, the reorganization managers might have turned the whole matter over to the syndicate if they had made such an agree ment. In that event, the syndicate, which we have termed the "underwriting syndicate," would be denominated the "purchase syndi cate." It would have bought the property at the foreclosure sale, turned it over to the new management for the securities, and dis tributed the securities in accordance with the provisions of the agreement the syndicate had made with the reorganization committee. This agreement would have included the same distribution of the new securities as we have discussed. In this, as in every other aspect of a reorganization, the details may vary widely. In the space at our disposal there is opportunity to discuss only the gen eral principles involved.