Ch.

10 - TT - Specific Standards For Bond Investment

Chapter Summary

- Re-iterates point from previous chapters covered that the soundness of the typical bond
investment depends upon the ability of the obligor corporation to take care of its debts, rather
than upon the value of the property on which the bonds have a lien.

- In direct contrast, various special types of obligations exist, the safety of which is in great
measure dependent upon the assets securing them, as distinguished from the going concern value
of the enterprise as a whole. These obligations consist of:

• Railroad Equipment Trust Certificates (secured by title to locomotives, passenger cars

and by the lease under which the railroad is using the equipment)

• Collateral Trust Bonds (obligations secured by the pledge of stocks and other bonds)

• Real Estate Bonds (obligations secured my multi purpose structures such as office,
apartment buildings & storefronts)

The characteristics that exist to the fixed assets securing these bonds can perhaps make the
argument for reliance upon just the underlying value of the pledged property:

• Railroad Equipment (specific property pledged is removable and usable by other

carriers)

• Collateral Trust Bonds (securities enjoy an independent salable value similar to

automobiles, jewelry and other chattels upon which personal loans are made)

• Real Estate Bonds (in this case the pledged land and buildings are said to be identical
with and not distinct from the success of the enterprise)

New Ideas/Concepts

- In the field of real estate obligations it should be recognized the advantage of a first mortgage
over a junior lien is much more clean cut than in an ordinary business enterprise.
Disagreements

- Strictly
acting on my own accord i would always apply the margin of safety test to the issuing
enterprise even if the assets pledged as collateral are of greater value than the bond issued on
them.

Practical Application

- Specialconsideration should be given to the above mentioned bonds as the value of their
pledged assets can be counted upon to a greater extent than their enterprise bond counterparts.

- Real estate bonds backed by special purpose structures (hotels, industrial plants) should only be
purchased based on the merits of the enterprise itself as an individual business.

- Individual mortgages on single family dwellings should only be undertaken if:

a) the loan amount is not over 66% of the value of the property as shown by recent cost or an
expert appraisal.

b) the cost or fair price does not reflect recent speculative inflation and does not greatly exceed
the price levels existing for a long period previously.

Questions

1. Would you agree with the notion that the above stated bonds (Railroad Equip., Collateral Trust
& Real Estate) should be given special consideration because the value of the fixed assets
backing them is more reliable in the event of a liquidation or bankruptcy?