Reconstruction of the Manila Railway Company Limited

From The Far Eastern Review January 1907

The directors of the Manila Railway Company have announced from their London office that negotiations for the reconstruction of the company necessary to carry out the terms of settlement with the United States Government, set forth in the circular of August 3rd last, sent to the shareholders, are concluded, and are contained in a plan of reconstruction issued to the shareholders with the report for the year ended December 31st, 1905. The plan has received the careful attention of the directors, and has been adopted by the shareholders.

Claim Against United States

The directors recall that after the Spanish-American War the company presented a claim for the amount due under the guarantee given with the Spanish concession; but
liability was denied by the Washington Government. After the return of the railway to the company there were presented to the United States Government claims for use and for damages. In June, 1905, the Philippine Government invited tenders from United States or Philippine Corporations or citizens for the construction of various lines on the Island of Luzon, as well as on other Philippine islands. Two members of the Board of Directors proceeded at once to Washington to take up again with the British Ambassador the negotiations for damages. After much consultation Messrs. Speyer & Co., of New York, with a view to cooperating with the company, and at the same time, as far as possible, to protect the shareholders' interests, presented a bid for the construction of various lines on the Island of Luzon, which were considered to be profitable commercial enterprises if worked in connection with the railroads owned by the company. None of the bids presented were accepted; but, as the result of subsequent negotiations, an award was made to Messrs. Speyer & Co. of a concession for these lines, which have now been assigned to a New Jersey Company organized by them, known as the Manila Railroad Company. The concession which has been granted to the American company is a perpetual concession, qualified only by the not unusual condition that it is subject to amendment, alteration or repeal by the Congress of the United States. It authorizes and requires the construction of 450 miles of railroad in the Island of Luzon, which are reported by Mr. Horace L. Higgins, general manager of the Manila Railway Company, Ltd., to be likely to be remunerative, and provides that the favorable rates of taxation prescribed in respect to the new lines shall apply to the existing lines when owned or operated by the American company, and that the concession or franchise shall appertain to the English company's lines when it shall have fully discharged all claims against the United States and the Philippine Government. Mr. Higgins, who has been closely associated with the Manila Railway since its formation, has agreed to take the office of President and General Manager of the American company.

A Satisfactory Position

In the opinion of the directors the position thus brought about is thoroughly satisfactory. They have, therefore, with the assistance of Messrs. Speyer & Co., in New York, and Messrs. Speyer Brothers, in London, very carefully considered how to effect the transfer of the property to the American company and the construction of the new lines, at the same time ensuring that practically the entire net revenue of both the present system and the new lines shall be retained. A new English company will be formed called the Manila Railway Company (1906), Limited, referred to herein as "the new company," which will act as a holding or securities company. As part of the plan, the following agreements will be made:-

(1)An agreement with the American company under which the English company will sell its undertakings in consideration of an agreed amount of the American company's securities;
(2) an agreement with the new company under which the old company will nominate the new company to receive such securities in consideration of the new company's issuing to the old company an agreed amount thereof;
(3) an agreement between the new company and American company for purchase by the new company of bonds and shares of the American company to be issued to obtain money for construction of new lines and other corporate purposes. Under the provisions of the Act of Congress applying to corporations doing business in the Philippine Islands, bonds and shares of the American company cannot be issued except in exchange for actual cash or for property at a fair valuation equal to the par value of the bonds or shares so issued.

The effect of the arrangement will be that there will be vested in the new company, as a holding company, practically all the bonds and shares issued by the American company. These will be vested by the new company in trustees, and against them will be issued the shares and securities of the new company, the prescribed portion of which will be offered to the shareholders in exchange for their existing holdings. The securities of the new company will thus have a charge on the entire net revenue, not only of the 208 miles of the present system, but of the further 420 miles to be built under the new concessions.

New Company

The Manila Railway Company (1906), Limited, will have an authorized capital of £4,000,000, divided into £200,000 5 per cent non-cumulative preference shares of £10 each and 200,000 ordinary shares of L10 each. There will be a present issue in 4 per cent "A" debenture bonds of £1,600,000 and in 4 per cent "B" debenture bonds of £1,730,000. Power will be reserved in the trust deed that further amounts of each class of debenture bonds may be created and issued for the acquisition of securities issued by the American company for the construction or acquisition of new mileage or other capital purposes, provided that the total amount of bonds to be issued for the construction or acquisition of new mileage shall not exceed the rate of £5,000 of each class per mile, and that for other capital purposes the amount to be issued shall not exceed £50,000 per annum of each class. It is proposed to deal with the securities and shares of the new company as follows: —Four per cent "A" debenture bonds: In exchange for the securities of the present company, £1,257,200; issued to provide funds for the requirements of the plan, £342,800; reserved for future construction and equipment, £1,400,000; total £3,000,000. Four per cent "B" debenture bonds: In partial exchange for the securities of the present company, £730,000; issued to provide funds for the requirements of the plan, £1,000,000; reserved for future construction and equipment £1,270,000; total, £3,000,000. Preference shares: In exchange for the shares and securities of the present company, £1,180,000; issued to provide funds for the requirements of the plan, £820,000; total, £2,000,000. Ordinary shares: In exchange for the shares of the present company, £399,270; reserve for new company, £1,600,730; total, £2,000,000. The interest charges on the £1,600,000 "A" debenture bonds and £730,000 "B" debenture bonds will amount to £93,200, thus reducing the annual interest charges by about £15,000. Mr. Higgins estimates that the net income of the present system of 208 miles, having regard to the increased traffic, which should be brought as each connecting branch of the new system is opened, will be £116,000 for 1906, and will by 1912 have increased to £153,000. It is estimated that the construction of the 420 miles of new railroad will cost approximately £3,100,000 for which the issue of the securities reserved for this should fully provide, and that construction should be completed in 1911. Mr. Higgins estimates that the yearly net earnings of the sections, beginning with 1907, should be as follows: £1,200, £29,300, £66,900, £112,200, £135,800, £155,000. The total estimated net revenue of the 628 miles when completed and in operation will be £308,100.

Terms of Exchange

The securities to be received in exchange for each principal sum of £100 existing securities are as follows: For 5 per cent first mortgage stock, £112 new 4 per cent "A" debenture bonds and i6s.8d. for accrued interest to December 31st, 1906; for 6 per cent prior lien bonds, Series "A," £120 new 4 per cent "A" debenture bonds and £3 accrued interest; for 6 per cent prior lien bonds Series "B" £115 new 4 per cent "A" debenture bonds and 3 accrued interest; for 6 per cent secured notes, £112 new 4 per cent "A" debenture bonds, with 3 os. 4d. accrued interest; for 6 per cent debentures £100 new 4 percent "B" debenture bonds, £100 new preference shares, and £6 cash; for 7 per cent cumulative preference shares,. £150 new preference shares; for ordinary shares, £300 new ordinary shares; for deferred shares, £300 new ordinary shares.

Annual Report

The report of the Manila Railway Company, ltd., for the year ended December 31st, 1905, states that the traffic receipts amounted to $1,694,820 and the expenses in Manila to $723,040 leaving $971,779, which, at 2s. exchange, is equal to £97,178. The profit on working the quay line amounted to £1,429, and the profit in exchange to £242, while the charges in London were £3,790, leaving as net revenue £95,059, out of which interest has been paid on first mortgage registered stock (£7,500) and on prior lien bonds, "A" and "B" (£35,100). The value of the Philippine currency has remained steady throughout the year at slightly over 2s. per dollar. The claims against the governments of the United States and of the Philippine Islands have been settled, subject to the consent of the shareholders and security holders, on the terms stated in the chairman's circular of August 3, 1906. The company's claims on the Spanish Government are being prosecuted, but the directors regret that they are still unable to report any recoveries. The construction of the extensions has made good progress. The receipts from extensions to December 31st, 1905, are £13,305. The amount paid for interest on secured notes during 1905 was £20,250, so that a debit balance of £6,944 is carried forward to 1906.