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pursuant to chapter XV of the Bankruptcy Act, providing for the refunding of the matured obligations, the extension of the maturity date of certain bonds, and the modification of other provisions thereof, including, with respect to a number of issues, modification of the interest payments, as hereinafter set forth.

Outstanding obligations of applicant.-On August 1, 1944, notes originally issued in the amount of $50,000,000 became due. Of these, $13,490,000 held by the Reconstruction Finance Corporation have not been paid, and on November 8, 1944, notes in the amount of $71,073,276, also held by the Finance Corporation, matured and the applicant is unable to pay them. The $50,000,000 of notes were issued pursuant to authority granted by order of division 4 dated July 28, 1934, in Baltimore & O. R. Co. Securities, 202 I. C. C. 118, and were extended pursuant to order of division 4, dated November 1, 1938, in Baltimore & O. R. Co. Financial Readjustment, 230 I. C. C. 243, and as to the portion of them held by the Finance Corporation, to the supplemental certificate dated September 15, 1939, in Baltimore & O. R. Co. Reconstruction Loan, 233 I. C. C. 771. Of the remaining notes held by the Finance Corporation, $2,955,000 are a part of the notes originally issued to the Federal Emergency Administration of Public Works, and later acquired by the Finance Corporation, and extended pursuant to the supplemental order of September 15, 1939, in Baltimore & O. R. Co. Notes, 233 I. C. C. 769. The remainder represents the unpaid portion of loans approved from time to time by division 4, the maturity dates of which were extended pursuant to the supplemental certificate of September 15, 1939, supra.

In addition to its obligations to the Finance Corporation, the applicant had outstanding, as of August 31, 1944, $28,369,823 of equipment obligations, $235,848,850 of first-lien bonds, $122,639,000 of refunding and general mortgage bonds, and $61,915,000 of unsecured bonds. This indebtedness, together with the secured notes held by the Finance Corporation, represents a total of $533,335,949, bearing annual interest charges of $23,770,267 of which $14,607,642 are fixed and $9,162,625 are at present contingent on earnings. In addition to the foregoing, the applicant has a number of operated subsidiaries, the bonds of which have not been assumed by it, but in respect of which it is required to pay the interest charges under operating agreements. These bonds consist of $27,659,000 of Buffalo, Rochester & Pittsburgh Railway Company bonds, $6,590,500 of Buffalo & Susquehanna Railroad Corporation bonds, including $4,501,200 of such bonds held in the sinking fund provided in the mortgage securing them, and $3,493,900 of Cincinnati, Indianapolis & Western Railroad Company bonds, such unassumed bonds bearing interest in the amount of $1,494,782

per annum of which $1,044,549 is fixed interest and $450,233 is at present contingent interest. The total interest payable by the applicant on these obligations outstanding as of August 31, 1944, was $25,265,049 of which $9,612,858 was contingent interest and $15,652,191 was fixed interest. In addition to the interest payments, the applicant's annual fixed charges as of August 31, 1944, include $432,963 of guaranteed dividends on stocks of leased lines. The applicant's capital stock outstanding will be hereinafter discussed.

Financial readjustment of 1938.-In 1938 the applicant, in order to avoid receivership or bankruptcy, arranged to adjust its financial structure pursuant to a plan for modification of interest charges and maturities, dated August 15, 1938, hereinafter called the 1938 plan, the particulars of which are given in Baltimore & O. R. Co. Financial Readjustment, supra.

Subsequent to our authorization under section 20a of the extension and modification of the securities affected by the 1938 plan, chapter XV of the Bankruptcy Act was enacted by Congress and approved on July 28, 1939. In pursuance to that act, the 1938 plan was approved by a three-judge court by a decree dated November 8, 1939, of the District Court of the United States for the District of Maryland in a cause entitled "In the Matter of the Baltimore and Ohio Railroad Company, Petitioner in Proceedings for Railroad Adjustment No. 9294."

The plan became effective as of November 8, 1939, and remains effective for approximately 8 years unless previously modified, and the applicant has complied with all the provisions thereof as to the payment of both fixed and contingent interest and has paid into the sinking fund approximately $8,062,152 in excess of the amount required by the plan. It has retired and will retire in excess of $100,000,000 of its outstanding debt, and as of November 30, 1944, had reduced its obligations for interest charges and guaranteed dividends by $5,548,187.

Need for financial adjustment.-Notwithstanding the gains made by the applicant in the reduction of its debt, its securities, except equipment obligations, until very recently were selling at substantial discounts, and it is now faced with the payment of the matured notes held by the Finance Corporation, and the maturity on July 1, 1948, of $144,748,850 of outstanding first-mortgage bonds. In addition to these maturities, $37,285,500 of Southwestern division bonds will mature on July 1, 1950, and $36,789,000 of Pittsburgh, Lake Erie & West Virginia bonds on November 1, 1951. In view of these early maturities, the applicant was unable to refund its outstanding notes except as a part of a general readjustment of its finances. The Finance Corporation has agreed to assent to the plan herein proposed

and to purchase, subject to the necessary approval of this Commission, the collateral-trust bonds contemplated therein, provided the plan can be put into effect.

Section 710 of chapter XV of the Bankruptcy Act provides that: Any railroad corporation not in equity receivership or in process of reorganization under section 77 of the Bankruptcy Act at the time of filing its petition hereunder, and which has not been in equity receivership or in process of reorganization under said section 77 within ten years prior to the filing of such petition, which shall have

(1) prepared a plan of adjustment and secured assurances satisfactory to the Commission of the acceptance of such plan from creditors holding at least 25 percentum of the aggregate account of all claims affected by said plan of adjustment (including all such affected claims against said corporation, its parents, and subsidiaries); and

(2) thereafter obtained an order from the Commission (but not a division thereof) under section 20a of the Interstate Commerce Act authorizing the issuance or modification of securities (other than securities held by, or to be issued to, Reconstruction Finance Corporation) as proposed by such plan of adjustment as filed, or as modified by, or with the approval of, the Commission, such order of the Commission to include also specific findings

(a) that such corporation is not in need of financial reorganization of the character provided for under section 77 of this Act;

(b) that such corporation's inability to meet its debts matured or about to mature are reasonably expected to be temporary only and

(c) that such plan of adjustment, after due consideration of the probable prospective earnings of the property in the light of its earnings experience and of such changes as may reasonably be expected-[meets certain requirements hereinafter set forth] and

(3) secured assents to such plan of adjustment or such plan of adjustment as modified by, or with approval of, the Commission, by creditors holding more than two-thirds of the aggregate amount of the claims affected by said plan, which two-thirds shall include at least a majority of the aggregate amount of the claims of each affected class, may file in the United States district court in whose territorial jurisdiction such railroad corporation has had its principal executive or principal operating office during the preceding six months or a greater period thereof, its petition averring that it is unable to meet its debts matured or about to mature, and desires to carry out the plan of adjustment.

The applicant is not now, and has not been in equity receivership or in process of reorganization under section 77 of the Bankruptcy Act within 10 years prior to the date of its application herein.

The applicant has not made any general solicitation of its security holders for assents to the adjustment plan, but it has received written assurances of acceptance from creditors holding at least 25 percent of the aggregate amount of all claims to be affected by the plan, and is accordingly qualified under the provisions of section 710 (1) of chapter XV of the Bankruptcy Act to file an application with this Commission.

With the view of providing for the payment of the secured notes due on August 1, and the loans from the Finance Corporation due on

November 8, 1944, the applicant discussed in 1943 and early in 1944 with banking interests the possibility of selling a new issue to pay the August 1 notes and to refund as a whole or in part the Finance Corporation loan, but was advised that without assurance that the early maturities amounting to approximately $217,800,000 could be met, the sale of term notes would be impossible. The feasibility of obtaining bank loans was also considered, but the Finance Corporation has a second lien on the collateral for the secured notes, so that the necessary collateral was not available. It was therefore determined to pay the secured notes held by the public with available funds and the proceeds of a short-term bank loan, and to consolidate the indebtedness to the Finance Corporation for an extended period. The Finance Corporation agreed to this proposal upon two conditions, first, that all maturities except equipment obligations be extended beyond the maturity date of the extended loan and, second, that modifications satisfactory to the Finance Corporation be made in the applicant's interest and other charges on its outstanding securities and a program of debt reduction be adopted.

The securities to be affected by the plan are widely held, there being approximately 70,000 bondholders. Of the outstanding bonds to be affected, about 59.45 percent are held in lots of $20,000 or more, 24.91 percent by insurance companies, 11.59 percent by banks and savings institutions, 4.44 percent by corporations, 5.90 percent by charitable and educational institutions, and 12.61 percent by individuals and partnerships. Approximately 17 percent of the securities to be affected are held by the Finance Corporation. Of the convertible bonds, 39.05 percent are held in lots of $20,000 or more, and the remainder are held by 11,967 bondholders. Owing to the great number of security holders, many of whom are in the war zone, a voluntary plan of adjustment was not feasible, and resort to Chapter XV of the Bankruptcy Act appeared to be the only solution. The matter was discussed with the representatives of institutional holders and the proposal was favorably received, the general purpose being that all prior lien bonds of any consequence be extended maintaining their maturities in their relative positions, but more widely spaced, that a part of the interest on the refunding bonds be made contingent and the maturity of the convertible bonds be extended beyond the maturity dates of the refunding bonds. The plan of September 20, 1944, was formulated along these lines and submitted to the Finance Corporation It was also taken up with a number of the large holders of each class of bonds, and assurances of acceptances were given, but, in certain instances, upon condition that a number of changes be made. These changes have been incorporated and are now a part of the plan herein described. Copies of the original plan were sent to all known holders

of the bonds to be affected, but to avoid the expense incident to a general solicitation in order to comply with the proxy regulations of the Securities and Exchange Commission, the number of acceptances actually solicited was restricted to not more than 25. Of $197,969,326 of claims affected by the plan, the holders of $167,933,004 have assented to the plan as modified, those who assented to the original plan having accepted the modifications. In addition to the formal acceptance, there is testimony to the effect that many letters have been received from individuals and officers of institutional holders stating that they approve the plan, and no refusals have been received.

The only objections to the plan which have been presented to us were offered by holders of the convertible bonds. George H. Phillips, of Denver, Colo., prior to the hearing filed a petition for leave to intervene and submitted a statement or brief setting forth his objections to the plan which will be hereinafter discussed, and offering a substitute method of meeting the situation. He was also represented by counsel at the hearing. Randolph Phillips, representing himself and other holders of convertible bonds aggregating $100,000, opposed the plan and moved that the petition be dismissed on the grounds that the proceeding is in violation of due process of law for the reason that no notice was given to the holders of any of the convertibles affected by the proceeding; that preference is given under article III of the plan in violation of the Securities and Exchange Act of 1934, Regulation X-14; that the Finance Corporation claims are improperly included among the 25 percent counted in the plan; that the Finance Corporation is not a creditor affected by the plan within the meaning or intent of the statute; that the plan is illegal as it represents a deprivation of the rights of property without compensation and that the Commission is without jurisdiction to entertain the plan by reason of the statutory violations alleged.

Notice of the filing of the application and of the hearing were given to the governors of the States in which the applicant operates and to the press in the customary manner, and notice of the hearing was served on the interveners. We are of the opinion that the application has been properly filed, and the motion of the intervener is overruled.

THE ADJUSTMENT PLAN

The adjustment plan dated September 20, 1944, as proposed to be modified, hereinafter called the plan, will provide for the issue of collateral-trust bonds to be sold and the proceeds applied to payment of the matured notes, and the issue of new bonds to be exchanged for certain bonds now outstanding or pledged. This constitutes a substantial recapitalization of applicant's funded debt except a relatively

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