If the bond conversion plan is adopted, the owners of prior liens will have to receive some inducement in the price or yield of the new bonds to cause them to exchange. This may be accomplished by a slightly higher interest rate, or by trading in the new bonds at a slight discount, or by extending to them some ad vantage in control or marketability not possessed by the older issues.
Altho mortgage bonds are preferred by specific security, consisting ordinarily of a lien upon a pro ducing asset, it should never be forgotten that, in the last analysis, their real value rests upon the earning power of the mortgaged property. Junior lien bonds, and even debentures, having no specific security at all, are often better investments than first mortgage bonds which are apparently well secured. Realization has thus aided in recent years the strong tendency of the American railways to simplify and consolidate their bond issues, by refunding underlying liens with gen eral mortgage bonds, which at the same time provide adequate bond reserves.
In the case of a railroad, built up by the consolida tion of smaller divisions each subject to the lien of of the hands of the stockholders and place it under control of the bondholders, pending a reorganization which will put the road upon an interest earning basis. Liens in this case are not utilized to deed the property to creditors, but to effect a reduction of fixed interest charges by compelling a reduction in the amount of the outstanding junior liens, or by scaling down the interest rates or priorities of existing issues. Follow various mortgages, if the bondholders should fore close and come into possession of the properties, they would find themselves unable to make a profit operat ing the various divisions separately. Probably no one of the divisions would have complete facilities, and each would have to depend upon the others to some extent. Under such circumstances the main advan tage of the mortgage lien is to take the property out