Peoria Railway Company first and refund ing 5's, due serially, February 1910-26, au thorized $3,600,000, contain a stipulation controlling the disposition of part of the earn ings in the covenant of the company to main tain a depreciation and maintenance fund from 1909 to 1925 to aggregate $1,865,000. The serial maturity retires only 40 per cent of the issue before 1926.
So far the examples given have illustrated only how in particular cases the bondholders of a corporation exercise control. The nature and amount of control that they exert vary according to special stipulations. Bonds, how ever, divide into several distinct classes, each with its identifying control characteristic. Only such general characteristics will enter into the further discussion. Of course, in ad dition to these, each issue, as already shown, may carry further peculiar restrictions of the shareholders' power. Of these classes (1) mortgage, (2) debenture, and (3) income bonds naturally group together.
A mortgage bond, as the name indicates, represents a fraction of a mortgage placed upon part or all of the property of the issuing corporation. It gives the strongest kind of contingent control. Under the stipulations of the mortgage, in case of failure of the corpora tion to pay principal and interest when due, or on any other default of like rank, bond holders, acting by such majorities and in such manner as the mortgage provides, can take possession and operate the property them selves, or sell it under their right of fore closure. In this way they can directly take the mortgaged property entirely away from the shareholders.
So far as the incidents of ownership are concerned, obviously a second mortgage dif fers from a first in accepting a greater risk and demanding a compensating greater income. The control it exercises is the same in kind as the control of a first mortgage: namely, the actual present control in limiting the freedom of action of the shareholders by the obligation to pay principal and interest, and complete contingent control, in case the shareholders' management should fail in this obligation. The contingency giving the second mortgage bondholder active control happens sooner than the contingency giving the first mort gage bondholder active control. The same
principles apply to a third or any subsequent mortgage.
It should be mentioned here that a bond may have the security of a first mortgage as to part of the property, and a second mort gage as to the rest. Such bonds do not call for special discussion at this time. They are gen erally recognizable under names like "first and refunding mortgage bonds," or "first and consolidated mortgage bonds." Debenture bonds, on the other hand, do not bestow upon their holders the powerful right to contingent direct control conferred by a mortgage right of foreclosure. The holder of a debenture, speaking broadly, and assuming the absence of special stipulations, has only the rights of a general creditor, and has less power than the mortgage bondholder to take control from the hands of the shareholders. Usually the debenture bondholder has the ad vantage of particular stipulations that put him in a stronger position than an ordinary creditor, but still leave him far from being as firmly intrenched as a mortgage bondholder. The existence of debenture bonds usually in dicates one of two very different situations, either from the unavailability of mortgages, which seldom are considered of any advan tage beyond the second and almost never beyond the third, or because the corporation is so strong that it does not need to offer a mortgage security. As an example of de benture bonds may be mentioned the New York, New Haven & Hartford convertible 32's, 1956, and various other issues of this company. It may be noted that this cor poration has no mortgage bonds of its own outstanding. Subsidiary companies have mortgage bonds. The Boston & Maine has debenture 41's, 1929, and other debenture issues. This corporation also has not issued any direct mortgage bonds. The Boston & Albany has debenture 4's, 1933, and others. This road (now leased to the New York Cen tral) presents a case of a line financed, as it stands at present, without any mortgage. The Milwaukee & St. Paul has de benture 4's, 1934, $28,000,000 issued, $50, 000,000 authorized. The Chicago & North western 5's, 1933 ($5,000,000). The New York Central & Hudson River Railroad 4's, 1934 ($34,000,000).