[.Volume XXV
THE CHICAGO BANKER
18
what it should be, though in others it is quite low.
While our electric, or interurban railways, are generally speaking, somewhat newer than the railroads, and should have to a large extent the same investigation and conditions existing, where the roads are heavy double tracked and rock ballasted, the country which they serve should be a larger factor, as they with few exceptions are more nearly intra and not inter-state propositions. Securities of this class will yield at present prices all the way from about 4 per cent to about 6 per cent, and are in many cases well secured and amply protected where their franchises are of long time and properly granted.
Of the public service securities other than the interurban railway, there are many as I have stated such as gas and electric, telephone and telegraph, and water power, which should prove after a thorough investigation, as to management, territory, and population served, opportunity for advancement, franchises, standing with community served, and physical condition of property, very good investments yielding a good return.
The record of gas securities in this country is very high. From statistics compiled a short time ago showing the condition of 877 companies doing business in 575 cities of this country, less than 1 per cent were in default of the interest on their bonds, let alone the principal, a showing no other class of corporation securities that I know of can make. Gas and electricity have gotten to be such a necessity, or commodity, that the consumption changes very little and is not affected by panics, hence the showing these properties are able to make. Telephone and telegraph could be said to be of a similar class and with few exceptions are very well regarded.
One should always examine a copy of the bond and mortgage, and should see that same has been approved by good legal talent. If this has not been done do not touch until it has, or you are liable to “get nothing for something.”
Many states have “legal investment requirements” in other words “laws regulating the investment of savings bank funds” and if one has not the facilities for thoroughly investigating as he should, the approval for the investment of savings funds by such states as Massachusetts or New York will go a long way towards proving the soundness of a bond. For instance, Massachusetts will not approve any bonds of any city not in the New England states and only a few state issues, while it will take no railroad corporation bonds which have not earned and paid at least 5 per cent on their capital stock for five consecutive years preceding the application for authority to have legally approved.
Because a bond is only paying the investor 3.55 to 3.90 per cent, to say that that is too low a return, or that one which is paying 5 to nearly 6 per cent is too high a return, is absolutely no proof and a ridiculous statement tor an intelligent person to make. The market and economical conditions have much to do with the price of money and the yield on bonds, and each and every case should be taken up separately and decided on its specific merits or demerits. Others have a mistaken idea that because a security is listed on some stock or bond exchange it is or should be gilt edged. No one after a thorough examination of the securities on such an exchange as the New York would fail to find himself sadly in error and subject to the loss of a few points of his hard-earned savings should he act on such a supposition. The requirement of listing on the New York exchange does, however, throw around a security, a certain publicity, and cause the compliance with certain restrictions, but the exchange does not stand sponsor for its securities. The great point t^ my mind is
nitions might have been given I believe all of you are sufficiently familiar with the issuance of securities to understand what I have said regarding each, and I shall now endeavor to have you see the investment point of view. The speculative point of view will be covered by my successor in his address on “Stocks.”
There are those who regard as good investment bonds, in other words “gilt edged,” only such as government, municipal, school, and possibly drainage bonds, bearing anywhere from 2 to 4 per cent, but there are undoubtedly many strictly high grade railroad and public service corporation bonds, properly issued, both as to legality and amount and I shall here give a few reasons for and against each with some facts and figures.
Before investing in any municipal bond, either state or city, one should consider the locality, the class and condition of its people, whether thrifty or not, and whether the real and assessed values of the property are excessive. To be within the bounds of safety the bonded indebtedness should not exceed 5 Per cent of the assessed valuation, thereby avoiding a community with a burdensome per capita tax and “overloaded.” When looking into the bonds of a state one should see for what purpose the bonds he is contemplating purchase were issued, and whether or not the improvement is useful and beneficial, always bearing in mind that no individual can bring suit in any court and recover from a state• One state can from another through the United States courts, but not an individual. Up to a few years ago, Alabama, Arkansas, Florida, Geor gia, Louisiana, Mississippi, North Carolina. South Carolina, and Tennessee combined had repudiated about $240,000,000 bonds, and the holders have absolutely no redress.
Conditions are now quite different than when these repudiations took place and after careful investigation I can see no reason why state bonds should not be a good investment■
As far as governments go I have already stated that any such bond issued by a responsible government should prove a safe investment.
Some drainage bonds have been found very good when issued on a live, growing community, and at not too great an amount per acre of the property assessed, a feature which should be thoroughly looked into. School bonds are generally very highly regarded, but should be subjected to proper investigation, as I have already stated. Most of these will yield about 4 per cent, the same as municipals, though in some of the Western states school districts have bonds bearing and 5 Per cent.
Before going into a railroad bond one should consider the management, the territory served, the condition of the property and equipment, the general standing with the travelling or shipping public, whether a first or second mortgage bond, and if the latter, whether the property if sold would bring enough to cover both mortgages, the company’s earning power, and its bonded indebtedness per mile of road. The examination of a truthful statement of earnings and expenses and balance sheet is a study in itself, and will reveal many great secrets of vital interest to the investor if given proper and due consideration. The bonded debt per mile of road will naturally be very different in different sections according to the condition of the country, whether rugged or level. In some of the Eastern states requiring very heavy cuts, fills, bridges, trestles, and in some cases tunnels, from $55,000 to $100,000 per mile would not be excessive, while in the Central and Western states where no such work is required, or in other words among the “Granger Roads” from $20,000 to $50,000, according to conditions, should be sufficient. In both cases these figures include equipment and stations, etc., therefore you can readily see that the bonded debt of some of our railroads is beyond
of the maturing principal on a certain future date without working a hardship upon a corporation through having to provide for the payment of a large sum on a given date by drawing down their surplus, or temporarily having to borrow it.
A consolidated bond is such in name only, in other words “theoretical” and may be either a first or general mortgage, though if the latter it is usually so designated. A railroad, for instance, may buy up several small roads and issue a consolidated mortgage covering all tire properties, to retire the bonds on the individual properties. If such is done and all the underlying bonds are taken up the consolidated mortgage bonds become first mortgage bonds.
General mortgage bonds have usually been issued by a corporation to raise additional funds for improvement, or enlargement, purposes while there are already outstanding on the same property, or part of it, first mortgage bonds. This may be taken as meaning a second mortgage proposition which in one sense it is but in many instances the value of the property is so far in excess of the original issue that the general mortgage bonds are well within a reasonable limit, and constitute practically a first mortgage, at least on that proportion of the property which their issuance and sale make possible.
A blanket mortgage bond is somewhat similar to a general mortgage bond in that it covers or "blankets” the whole, though sometimes a blanket mortgage bond may cover separate and distinct properties belonging to the corporation which are not actually connected. or dependent, upon each other.
Assumed bonds are those already outstanding upon properties when taken over, or "assumed” by a corporation and are only so in name. Many times the company assuming, guarantees the principal and interest on the assumed bonds, and so signifies upon each document thereby making them guaranteed bonds in addition to the lien which they carry.
Adjustment mortgage bonds have been created and issued under some adjustment plan, and may, or may not be first lien bonds. Very few of this class of note have been issued, the only record of which I have been able to find being an issue of the Atchison, Topeka & Santa l-'e By., made in 1895, at the time of the reorganization■ The first mortgage bonds were scaled down to 75 per cent, and the adjustment mortgage bonds issued to the amount of the other 25 per cent, plus some defaulted interest.
A general first mortgage bond is different from the general mortgage bonds which I have described, being a first mortgage, or general first on all of the property covered.
Funding bonds are bonds usually issued to take up and “fund” certain floating indebtednesses, and may be made a mortgage security, though this term usually applies to “bonds of municipalities.”
Purchase money bonds are those issued by one corporation to another in payment for stock or property purchased, as for instance, if the Subway Company of Chicago, should purchase a certain amount of stock from the Commonwealth Edison Co., and give in payment “purchase money bonds” bearing a certain rate of interest, and payable on a certain date.
Railroad aid bonds, the last which I previously enumerated, are bonds which have been issued by a municipality to raise funds with which to financially assist a railroad presumably building through its territory, and are now more or less obsolete. Many of these were issued by the Southern states immediately following the Civil War, and have been repudiated, consequently they are to be avoided as an investment.
I have gone into this description and given these definitions in order that you might get as good an idea as possible from such a talk, and though more detailed descriptions and defi-