Suppose now that a railroad, with credit equaling the average of these ten, had bonds maturing in 1915 which it desired to refund for thirty years. Payment could not be postponed and yet the market, as above indicated, was unfavorable to new issues. Perhaps the managers figure that by 1920 conditions again will be as good as .in 1909. Setting aside our personal opinions, and assuming their estimate to be correct, it would cost, during the life of a thirty-year bond, 25.5 per cent more interest to sell the bonds in 1915 than to postpone the issue until 1920. Under these conditions the road will sell its five-year five or six per cent notes, maturing in 1920, for the purpose of pay ing off the bonds maturing in 1915. When these notes mature in 1920, it is planned again to sell bonds at 4.15 per cent interest for the purpose of paying off the notes.
The note interest would be about one per cent higher than bond interest for five years, leaving a net gain over the entire period of about twenty per cent from financing temporarily by notes and awaiting a better bond market. Perhaps the same collateral will be deposited behind the notes as behind the maturing bonds. This example illustrates the purpose which actuated many companies to sell notes in 1914, 1915, 1916, and 1917.
9. Dangers in the use of corporate notes..—Sum marizing what has previously been said, it appears that corporate notes should not be offered to the pub lic or to the banks without observing the following principles : 1. They should be issued only as a temporary expe dient.
2. Unless self-liquidating, or covered by a large surplus of quick assets, they should not be issued ex cept in premeditation of the reasonably assured sale of stocks or bonds, out of the proceeds of which the notes can be retired.
3. If possible, in order to insure their sale upon the best terms, the notes should be issued serially and secured by the deposit of collateral with a trustee, with provision for substitution of collateral within reasonable limits and with privilege of redemption at a stated price upon reasonable notice.
4. Interest paid should not greatly exceed the rate it would be necessary to pay if it were to borrow on a new issue of bonds.
Interest. is usually semi-annual, but may be quar terly or annual. It may be payable on specific dates to registered holders, or by coupon, as in the case of bonds. The stated interest rate never exceeds six per cent, and rarely runs as low as five per cent. If a higher yield than six per cent is demanded, it takes the form of a discount on the selling price of the note. Thus, a three-year note which must yield seven per cent to attract investors will bear six per cent interest and sell at about 98. Rarely more than seven per cent
is paid on strong issues.
The trust agreement under which secured notes are issued does not vary greatly from that of collateral trust bonds, which will be fully described in a later chapter. The actual wording of corporation notes varies with the circumstances of issue, with the amount of the issue, security pledged, purpose of issue, form of interest payments, methods of sale, credit of the company and other similar considerations.
10. loans in short term loans have been comparatively common during recent years in the United States, it was not until the years 1912 and 1913 that they commenced to appear as an important factor in Canadian finance. At that time, too, the issues of such securities by United States corporations were unusually numerous. Canadian provincial governments and municipalities were among the first to utilize this method of financ ing. In 1913, the movement spread to the Canadian railroads and both the Grand Trunk and the Canad ian Northern Railway Companies made such issues. Since then, and especially after the outbreak of the European war in 1914, a large volume of short-term loans has been issued by industrial corporations and others. This form of financing seems to be particu larly popular in times of financial stringency.
The tendency in Canada has been to retire short term notes, whenever possible. Certain Canadian in dustrial companies, as well as many in the United States, made exceptional profits in 1915 and 1916, thru war orders. The Canadian companies vigor ously maintained a policy of retiring their short-term obligations out of these profits. The Dominion Steel Corporation, for example, paid off in cash on Decem ber 1, 1916, £700,000 of 6 per cent notes maturing on December 1, 1918. The company's debts to the banks having been already liquidated, the balance of the cash had accumulated by the beginning of that month to proportions sufficient to allow payment of the five-year notes which represented the last of the corporation's short-term obligations.
A short time previously the Lake of the 'Woods Milling Company of Montreal announced the retire ment of $750,000 of maturing bonds which it had guaranteed for a subsidiary company. On a smaller scale the same policy of strengthening working cap ital, thru liquidation of floating debt or accumulation of liquid resources, has been put in force by numer ous other industrial concerns in Canada, and the cumulative effect has placed Canadian industry gen erally on a stronger financial basis.