Equipment bonds derive additional security from the fact that the relative value of the collateral in creases with time, as the bonds are retired. This is because the life of the bond is shorter than the life of equipment which secures it, with the result that the margin of security constantly increases as the bonds are paid. Furthermore, the equipment must be main tained in good condition, not only as a necessity of operation, but because the trustee is empowered to cancel the lease and take back the rolling stock if this is not done. These bonds never run longer than ten years, one-tenth of them being paid off each year, but the equipment has a much longer life and remains the property of the bondholders, under the trustee, until the last bond has been paid off.
3. Grand Trunk surprise was created in American and English financial circles in July, 1913, when the Grand Trunk Railway of Canada issued in London £ 1,500,000 five-year, 5 per cent secured notes, dated October 1, 1913, and due October 1, 1918. The notes were in denomi nations of £200 and £100, registered as to principal only. The company reserved the right to redeem the notes at 101, either as a whole or in amounts of not less than £200,000, by drawings on any interest date upon sixty days' notice. In the event of any notes being reduced before the date of maturity, the trustees would release a proportionate part of the debenture stock deposited with them as security. The notes were secured by the deposit with the trustees of £2,000,000 Grand Trunk perpetual 4 per cent con solidated debenture stock.
The proceeds of the notes were to be applied in part payment for additional rolling stock (75 engines and 8,000 freight cars), the contract price of which exceeded £2,000,000. It looked, therefore, like an is sue of equipment notes, but Canadian financial au thorities were not inclined to class them as such, since the terms of payment and the periods are somewhat different from the standard equipment trust bond or note described in previous pages.
4. Terms of the will not permit re producing the Text of a corporate lease. The fol lowing, however, are the more usual provisions : 1. A description of the leased property. In this connection, it should be noted that the inventory may change from time to time as the condition and char acter of the property change. Annual inventories may be filed with the trustee or lessor.
2. Length of the lease. In case of equipment rarely more than ten years. In case of permanent
properties, such as rights-of-way, etc., usually 99 years, but sometimes as long as 999 years. Some times shorter leases are subject to renewal on certain • stated terms.
3. Payments under the lease. These usually pro vide that the lessee, in addition to the rental, should pay all taxes, insurance, interest and maintenance charges. The rentals may be a fixed amount or based upon a sliding scale, which permits the lessor to share in the profits arising from the use of the leased property.
In equipment leases, however, it is customary to provide for certain definite payments. The original cash payment should be sufficient to cover the ex penses and profits of the syndicate or lessor company, and subsequent deferred payments should be gauged to cover the actual cost of the equipment. The subse quent payments are equal in amount to the equipment trust bonds which have been sold to pay the manu facturers of the equipment. Many varying practices govern payments by lessees under leases. These stated here are the more usual ones.
5. Maintenance of the leased property.—If proper maintenance of the property is not stipulated the lessee might abuse the property for the purpose of making high profits from its use, regardless of the interest of the lessor. This is particularly true in the leasing of permanent properties, such as rights-of way, terminals, etc., the upkeep of which the lessee is likely to neglect as the expiration of the lease ap proaches, unless a renewal is anticipated.
In the case of equipment bonds, it is merely neces sary to provide that all properties destroyed or in jured shall be replaced by the lessee, and that the equipment shall be kept in first-class condition. Since equipment syndicates or subsidiary companies are usually friendly interests controlled by the lessee rail way, difficulty in this line rarely occurs.
In the case of long-term leases of permanent prop erties, however, such as that of the Interborough Company previously mentioned, very exhaustive pro visions are necessary to insure that the lessee will pre serve and maintain the property in thoro repair and working order, at full efficiency, and return it to the lessor in at least as good condition as when the lease was made originally, by replacing worn out, damaged or lost equipment, etc., and complying during the leasehold with all requirements of law regarding the construction, maintenance and operation of such property.