Those who join in the reorganization will receive securities of the new company in exchange for their old ones. Since the bankers are putting in new cash to help save an involved business, they will naturally demand for themselves prior lien security and an am ple underwriting profit. The former claimants will have to be satisfied largely with junior lien bonds or capital stock, with the possible exception of those who were formerly well secured.
12. Assessment of junior lien insolvency of any company, or its reorganization un der receivership, rarely leaves any equity to the com mon stockholders and usually very little to the pre ferred. The trade creditors and owners of junior lien bonds are of course in a better position, but neverthe less they stand to lose heavily if it becomes neces sary to sell the property in the open market. Fixed assets rarely bring at forced sale more than a third or a half of their operating value, and often less. This shrinkage is likely to eliminate entirely or to reduce greatly the holdings of the general creditor or junior lien bondholder. Where the outstanding securities consist largely of general mortgages or collateral trust bonds, it is even possible that the owners of these un derlying liens will suffer in the event of a forced sale. This explains why all parties are usually interested in cooperating to secure a reorganization which will prevent the undue sacrifice of the property and give them an opportunity to preserve their investments.
The preferred claimants are able to dictate largely the terms of reorganization because they stand closer to the property and would not suffer so much loss as the others in a judicial distribution of assets at public sale. Frequently, the junior interests are permitted to join in the reorganization only on payment of liberal assessments. In the case of stockholders, the assessment is likely to be not far from the estimated market value of the new securities which they will receive. In such case, their participation amounts to little more than an opportunity to subscribe to the se curities of the new company, on what may be a slightly preferential basis, yet most stockholders like to feel that they are participating and that in some manner the plan of reorganization preserves to them a part of the equity which they formerly held.
This equity, which stockholders and often unsecured creditors imagine is preserved to them under reor ganization, is one of the great illusions of corporation finance.
13. Foreclosure sale.—Altho the foreclosure suit under the defaulted bonds was filed immediately after the appointment of a receiver, the foreclosure sale is about the last stage in the procedure of reorganiza tion. The foreclosure sale does not take place until after the self-appointed protection committees have secured the deposit of a liberal proportion of the bonds of the defaulting company, have begun an exhaust ive examination and appraisal, have formulated thru their special committee a plan of reorganization and appointed reorganization managers, and after these managers, having made an underwriting agreement and filed the reorganization agreement with the trustees for the assent of security holders, have se cured the participation of a liberal percentage of the creditors and the assent of the court to a satisfactory upset price.
The reorganization recounted here is typical of American railroads, and often requires several years for completion. The appraisal itself may take a year or two, and during this time the plans have been going forward. Now that all is in readiness for the fore closure sale, the assessments of stockholders are called and receipts given to them. These receipts are later converted into the securities of the new company. If not enough cash is raised in this manner to cover all requirements, the underwriters are called upon to advance a part of their cash against the new securities. To insure against fake bids, the court always requires that a liberal deposit, to apply upon the purchase price, be made by bidders before the sale.
At the sale, which is public and thoroly advertised, the reorganization managers are usually the only bidders ; and the property is sold to them, or to the new company which they have formed, at the upset price established by the court. The upset price is usually less than the debts of the company, especially where blanket mortgage or collateral trust bonds have been issued. If only a part of the property were sold, deficiency judgments remaining outstanding after the distribution of the proceeds of the sale would have some value, but ordinarily the property is sold as a whole, and the unpaid portion of creditors' claims have no further values unless they have been in dorsed by some outside party.