'•»•M,
U»HAfl¥
OF RAILWAY ECOllOMlOl.
WABHINSTCN, 0. 0> .
- THE CASE
Ö P THE
Preferred Bondholders
OF THE
CHESAPEAKE AND OHIO
Canal Company.
RESPECTFULLY SUBMITTED TO THE
¿rosier ip.
Counsel for tho Bondholders.
»I
M
m81î
r. ALTIMORE:
PRINTED BY KING BROTHERS.
1878.
THE CA.SE
OP THE
Preferred Bondholders
OF THE *
COMME Ai OHIO Clil COiPlNÏ.
To the Honorable the General Assembly of Maryland :
By the Act of 1844, oh. 281, the State of Maryland, which
then held a first mortgage upon all the property, tolls and
revenues of the Chesapeake and Ohio Canal Company, and
owned in addition, five millions one hundred and sixty-three
thousand dollars of its stock, waived its priority as mortgagee
of the tolls and revenues, in favor of such persons as would ad¬
vance to the Company, upon its Bonds, the sum of seventeen
hundred thousand dollars for the purpose of completing the
Canal to Cumberland. By the same Act the Company was
authorized to issue the Bonds, bearing interest payable semi¬
annually, and to secure the payment of both principal and
interest, by the execution of a mortgage upon all its tolls and
revenues, with the privilege and authority, however, to the
Company to apply such portion of its tolls and revenues as
might be necessary " to put and keep the Canal in good con¬
dition and repair for transportation, provide the requisite
supply of water, and pay the salaries of officers and agents,
and the current expenses of the Company."
2
The Act was duly accepted ; iu June, 1848, the mortgage
authorized by it was executed ; the Bonds were issued ; and
in October, 1850, the Canal was completed to Cumberland.
But for this legislation, and the advances then made under
its provisions by the Preferred Bondholders, the Canal could
not have been completed, and the large loans and subscriptions
previously made by the State would have been utterly lost.
From January, 1852, down to January, 1872, the Bondholders
received no interest on their Bonds, [with the exception of a
payment in 1857^ and again iu 1867, of a portion of the inte¬
rest on the coupons of July, 1852, January and July, 1853,
and January, 1854, funded in 1854,] and of course no provi¬
sion was made for the redemption of the Bonds at their ma¬
turity in 1882, 1888 and 1884.
In 1872, the Company, having redeemed the Piepair Bonds
and interest thereon issued in 1849, and amounting in all to
nearly $435,000, began to pay the outstanding coupons in
the order of their seniority, upon the Preferred Bonds, and
up to the present time have retired all the coupons up to and
inclusive of that which fell due on the 1st July, 1864.
This last payment was made in January, 1877.
The present bonded debt of the Company, (exclusive of the
Bonds for repairs authorized by an Act of this present ses¬
sion,) amounts now, as follows :
This debt, secured by a pledge of the tolls and revenues
of the Company, has priority over the claims of the State,
and must be paid in full before the State can rightfully re¬
ceive anything.
Principal
Overdue coupons since July, 1, 1864,
$1,699,500
1,376,595
13,076,095
3
At the rate at which the overdue coupons have been paid
ofif since 1872, it is manifest that long before the fourteen years
of arrearages now outstanding can be retired, the Bonds them¬
selves Avill mature, and that in the meantime, from five to
seven years of accruing coupons will also have matured.
If for every year from this time out the net revenues of the
Company should be sufficient to redeem five of the outstand¬
ing coupons, it would require six years to pay off the coupons
now actually overdue. During these six years, twelve more
coupons will become due, and thus, in 1883, (the year in
which most of the Bonds mature,) the preferred debt of the
Company overdue and payable, consisting of Bonds and ac¬
crued coupons created under the Act of 1844, ch. 281, will be
at least two million three hundred and twenty-five thousand
dollars.
At the same rate as above stated, it will require at least
twelve years more to extinguish this indebtedness together
with the interest on it, and thus it is too plain for argument,
that if no change is made in the condition and character of
the bonded debt, it will take eighteen j^ears to pay off the
Preferred Bondholders.
Assuming that the earnings of two years will be needed to
extinguish the new Kepair Bonds for $500,000, about to be
issued, it is clear that full twenty years must elapse before the
claims absolutely ahead of the State will be retired ; and
hence, before the State can be entitled to receive one dollar
from this Company.
The Canal, therefore, now practically and virtually belongs,
and for many years will continue to belong, to the Bond¬
holders. They are entitled to all its net earnings ; and until
their preferred lien is fully extinguished, the State can derive
4
no advantage, and receive no income from her large invest¬
ments in this great work.
Realizing,however, the magnitude of these investments;
appreciating the liberality with which, in former years, the
State contributed towards the construction and repair of the
Canal, and willing that she should share at once to some de¬
gree in the earnings of the Company, the Bondholders have
laid before your Honorable Bodies two measures, which,
while intended to give increased security to their Bonds, at
the same time will not only greatly improve the condition of
the State, by surrendering in her favor one-fifth of their
prior lien, but also, under provisions carefully framed, to protect
her from all reasonable danger of loss or injury, will admit
her to an immediate participation in the net revenues of the
Company ; a participation which, as has been already shown,
she can not otherwise expect to enjoy for certainly twenty
years.
These measures are embodied in two separate Bills, both
of which have been discussed by the Counsel of the Bond¬
holders before the joint Committees of Finance and Ways
and Means of your Honorable Bodies.
The first of these Bills is entitled : " An Act authorizing
the Chesapeake and Ohio Canal Company to issue a New
Series of Bonds in Exchange and Substitution for Bonds
issued in pursuance of the provisions of the Act of 1844, ch.
281," &c.
This bill, after reciting in its preamble the present condi--
tion of the bonded debt of the Company; the long delay
which must inevitably take place, before the State, in the
present condition of things, can possibly receive any part of
the earnings of the Canal, and the willingness of the Bond¬
holders to exchange their present Bonds and accrued coupon^
5
for new Bonds, at an abatement of twenty per cent, of theîr
present claim, thus actually releasing for the benefit of the
State upwards of six hundred thousand dollars, provides in
detail for the issuing of such new Bonds by the Canal Com¬
pany. They are to run twenty years from 1st day of Jan¬
uary, 1878, with semi-annual coupons for interest, and are to
be secured by a mortgage of the Canal and its tolls and rev¬
enues, subject only to the Bonds for repairs authorized by an
Act of this present session.
The practical effect of this Bill will readily be seen from
the following statement :—
Present bonded debt :
Preferred Bonds—Principal $1,699,500
Overdue and outstanding Coupons from July 1,
1864 1,376,595
Present debt $8,076,095
Deduct 20 per cent 615,219
Amount of proposed Bonds $2,460,876
Add proposed Eepair Bonds, say 200,000
Total $2,660.876
Interest on this debt at 6 per cent, will be $159,652
Sinking fund annually 25,000
$184,652
Assuming annual net revenue of the Company
to be 250,000
There will remain annually for the State, under
this proposed Bill $65,348
6
If, as is confidently believed will prove to be the case, the
annual net revenue of the Company, upon the revival of bus¬
iness, should exceed the above estimate of $250,000, the di¬
rect and immediate pecuniary advantage to the State from
the proposed Bill will, of course, be proportionately increased,
and indeed, may easily amount to more than $100,000 annu¬
ally.
Twenty-five thousand dollars (25,000) spent annually in
buying the Bonds as a sinking fund, will place in the trea¬
sury, by the time they mature, so large a sum as will make
their redemption a comparatively easy matter ; and if, in the
meantime, the State, instead of realizing the amounts named
above, should annually receive only $50,000 from the net rev¬
enue of the Company, the aggregate sums paid her will reach
the enormous amount of one million dollars ; whereas, if no
such legislation as is now proposed be adopted, she cannot
possibly receive anything, as has already been shown, for
quite twenty years.
As a consideration for thus releasing to the State twenty
per cent, of their present claim, and admitting her to an im¬
mediate right to so large a share of the surplus net revenues of
the Company, the Bondholders simply stipulate that the Com¬
pany may be authorized to give them a new mortgage, which
will make the proposed new Bonds more secure than their pres-
'ent Bonds are under the mortgage of 1848, and which they
hope will impart to them a solid and permanent market value.
Even this stipulation they surround with so many restric¬
tions as practically protects the State from being in any de¬
gree prejudiced by it; for by the express terms of section 6 of
the Bill, it is declared that no proceedings to enforce their
claims can be taken without the concurrence, in writing, of a
majority of the Bondholders, and a default in the payment
7
of three successive coupons. As it is hardly possible that
such a default can occur, these conditions virtually secure
the Company from all danger of a foreclosure of the
mortgage, and remove all reasonable objections to the Bill.
This provision is copied substantially from the Act just
passed, authorizing the Company to issue $500,000 Eepair
Bonds, and the reasons which were deemed sufiScient for the
adoption of such a stipulation in that Act will, it is hoped, be
thought quite conclusive for its repetition here.
This Bill is certainly fair and reasonable. The calculations
upon which its passage is respectfully asked, are founded
upon the official reports of the Company for the last seven
years ; and the advantages which it proposes to the State are
substantial, large, and certain to be realized.
On the other hand, the only concession it asks is the simple
waiver of the State's lien on the Canal, which, even if re.
tained, can yield nothing to her, and if waived, will regularly
put into her treasury, for the benefit of her taxpayers, from
sixty-five thousand to one hundred thousand dollars, year after
year, for the next ttventy years.
The other Bill provides for the transfer of fifty thousand
shares of the Capital Stock of the Chesapeake and Ohio
Canal Company, owned by the State, to the Trustees of the
Preferred Bondholders, to be held by them for twenty years.
This transfer will, when made, give to these Trustees con¬
trol of the Company ; and the object of the Bill is to place
the management of its affairs in their hands for that period.
8
In consideration of this transfer, the Bondholders agree
that the State shall annually receive ten per cent, of the
gross revenues of the Company—five per cent, to be paid for
the general uses of the State, and the other five per cent, to
be used in buying the Bonds for a sinking fund.
In order to protect the State against the consequences of
foreign influences, or mismanagement of any kind, several
sufficient checks are provided :—
1st. A majority of the Board of President and Directors
are required to be citizens of Maryland, resident therein for
five years preceding their election. ,
2d. A monthly statement of the Company's receipts and
expenditures, with the vouchers, is to be made to the Board
of Public Works.
3d. The Canal is to be examined quarterly by a competent
engineer, to be selected by the Board of Public Works and
paid by the Company, and is to be kept in the like good order
in which it is at the time of the transfer. Upon failure to keep
it in such good order upon notice from the Board of Public
Works, the stock is to be re-transferred to the State, and the
Act is thereby to become void.
Ith. The Trustees are not to be authorized to transfer the
stock, by way of sale or pledge, to any person or corporation,
nor is the General Assembly to be at all prevented from sell¬
ing, at any time, the whole or any part of the stock.
5th. If the ten per cent, of the gross revenues is not
promptly paid, the State is to resume her control of the Com¬
pany at once.
6th. The Trustees are to give bond, in the penalty of
$100,000, conditioned for the faithful performance by them of
the obligations imposed upon them by the Act.
9
Under the operation of these provisions, it is not possible
that the interests of the State or of the Company can suffer ;
while the practical effect of the Bill loül he to give to the State
about $25,000 a year in money, and $25,000 to be spent in buy¬
ing tip the Bonds for a sinking fund.
In appealing to the General Assembly to grant them this
measure of relief, the Preferred Bondholders, while heartily
recognizing the ability and integrity of the management of
the Company for the last eight years, believe that in their
hands, freed from all connection with party politics, and con¬
trolled only by those considerations of economy, and that
rigid attention to details which are the secret of all success¬
ful business enterprises, the gross expenses of the Company
may be reduced to a point lower than has yet been seen in
its history, and its annual net revenue for distribution thus
largely increased. They feel that it may be made to earn
annually $300,000 of surplus income, and in this belief
they ask to be permitted to make the proposed experiment
For the privilege of managing a work which virtually belongs
to them, they offer to give to the State a tenth of the annual
gross receipts of the Company. In 1870, they made a simi¬
lar proposition. Had it been then accepted, there would
have been paid into the Treasury since then the sum of
$850,000.
They hope that so suggestive a reminder will not now be
disregarded.
The combined results of both of the proposed Bills may
be thus stated :—
10
Assuming the annual gross revenue to be $450,000
the net revenue will be $250,000
From this there must be deducted
as follows :
First—Ten per cent, of the gross
revenues to be paid to the State,
as the consideration for the
transfer to the Trustees of the
State's stock $ 45,000
Seœnd—Interest on Bonds, \ viz :
New Kepair 12,000
New Preferred 147,562
Sinking Fund 25,000
229,652
Annual surplus for the State $ 20,348
Bj this statement, the annual pecu¬
niary benefit to the State would
be as follows, viz :
Annual Sinking Fund for redemption
of principal of Bonds under first
Bill 25,000
Ten per cent, of the gross revenues
under second Bill $45,000
Surplus as above shown 20,348
$90,348
11
The. annual amount for the Sinking
Fund would be as follows :
Specific amount under Bill for issue
of new Bonds 25,000
Five per cent, of gross revenues
under second Bill. $22,500
The annual cash to the Treasury
would be as follows, viz :
Five per cent, of gross revenues... . 22,500
Surplus as above shown 20,348
$47,500
$42,848
$90,848
Such a sinking fund would be more than ample to extin¬
guish the whole debt by the time it matured ; and in the
meantime, the State would, in addition, receive for the gen¬
eral purposes of the treasury, an annual payment of upwards
of $40,000. With an increase of the net revenue of the Com¬
pany, under the proposed new mangement, to $300,000,
( about what it was in 1873, ) ' the total annual benefit to the
State, including the sums set apart for the sinking fund,
would amount to $140,000.
These plainly stated, will be the results of the proposed
Bills. In view of the expected deficiency of the State's reve¬
nue as shown in the recent'report of the Comptroller, they
come as measures of timely relief to the treasury and will
12
tend to obviate the additional taxation suggested by him as
necessary to meet its pressing needs. In this aspect merely,
their practical importance and value make them well worthy
of your earnest attention—and they are respectfully submit¬
ted for your consideration, in the firm belief that after the
most thorough examination they will be found to be just, expe¬
dient, and highly advantageous to the State,
JOHN P. POE,
On behalf of the Preferred Bondholders
of the Ches, and Ohio Canal Company.
March 1,1878.