Victorian Railway Finance

[SimonPencader]

I am dipping a toe into the finances of the Carmarthen and Cardigan Railway but some of the terminology used is confusing.
The 1852 prospectus of the company offered £20 shares for an initial deposit of £2 2s 0d and the promise to pay other calls as and when required. Presumably as and when the company needed money it made calls on the shares until the shareholders had paid the full £20. This is fairly clear.

In 1866 the then Chairman John Everitt warned against and overissue of Lloyd's Bonds. The contractor Mr Holden denied over issuing Lloyd's Bonds and threatened to sue Everitt for libel. What is/was a Lloyd's Bond?

In 1868 the company was in court accused of issuing more debentures than it was empowered to do. This appears to be a means to raise money as new debentures could be issued to pay off old ones. What was a debenture?

I would be grateful if anyone can help me understand what was what.

Thanks,

Simon

[Rhobat Bryn]

To answer your second question first, a debenture is long-term loan taken out by the company, as opposed to ordinary shares which represents an individuals stake in the company. It usually is repayable at a fixed date and is normally charged at a fixed rate of interest. The advantage to the debenture holder is that the interest on the debenture is paid to them first out of the company profits, ahead of the ordinary shareholders. The advantage to the company is that the rate of interest is usually lower than that available on other sources of finance such as an overdraft.

The reason that the rate of interest is lower is that it is usually secured against the assets of the company; this may be a fixed charge, i.e. over property or equipment, or a floating charge, over stock.

In terms of issuing debentures beyond its authority, this may be because the Articles of Association limit the worth of the debentures that can be issued. For instance, they may say that the company may issue debentures up to a limit of 50% of the company's assets. Or they may have issued debentures to a value which was beyond the value of the company's assets, e.g £1m assets and £2m debentures. In other words debentures are being issued for which no security exists.

I must confess I haven't heard of a Lloyds bond before. Rather than try and guess, I'll try and get back to you on that one.

[Rhobat Bryn]

Having done a little research, I think I may have an answer to your first question regarding Lloyd's bonds.

A bond is in essence an IOU. They come in many shapes and forms but a usual condition of issuing them is that the interest on the amount owed is paid once or twice a year until the money is repaid. A Lloyd's bond is a bond that is issued when work is completed or goods are delivered. It was devised by an English lawyer called, unsurprisingly, Lloyd. It was apparently a way round existing legal indebtedness. In other words, instead of taking out another loan and increasing legal indebtedness, the bond enabled the company to avoid that. However, as yet, I cannot explain how.

In the case of your example, it would appear that the the issue of a Lloyd's bond was in place of paying for work completed or goods delivered. To overissue them would be to postpone payments and increase the level of off-balance sheet (I aasume) indebtedness and thus put the financial security of the company at risk.

[SimonPencader]

Thank you both. If I understand correctly a debenture is similar to a mortgage, a loan secured on the company's property but over a shorter period of time. A Lloyd bond seems to have been much riskier. When Carmarthen and Cardigan were in court in 1868, a Mr Tuglesfield had received 4 x £500 debentures in return for a payment of £1000 and the surrender of a Lloyd bond (presumably to the value of £1000), the debentures were good security for the £1000 but were not a good consideration for a Lloyd bond. Its not clear whether the company or Tuglesfield instigated the exchange of the bond for debentures. I would guess that one or other wanted to convert the Lloyd bond into a more secure form of debt.
According to the 1867 balance sheet published by Bradshaw the C&C's liabilities were approximately a million pounds. This included 120 debentures of £500 each which represents the full extent of the company's borrowing powers, ie £60000. £735,243 of the liability was in Lloyd bonds - the majority had been issued to Mr Holden, the contractor, and Mr. J.Jay, the company's first contractor. These would have been for work completed. However, Samuel Crosse, a company director, also held £5500 worth of Lloyd bonds which I don't quite understand.
No bonds were issued to Tuglesfield so I assume Holden or Jay had sold on bonds so that they had some sort of payment for the work they had done.
Does this seem reasonable?
One further question, what is the difference between a preference share and an ordinary share?

[Rhobat Bryn]

An ordinary share is a unit of investment in the share capital of the company. If a company makes a profit, then this is usually distributed among the shareholders via the dividend per share. This dividend is usually variable in that the amount paid to the shareholder varies from year to year or may not be paid at all.

A preference share is a share in the company which pays a fixed rate of interest rather than the variable dividend of the ordinary share. A preference share is a share in the company as compared to a debenture which is a secured loan. The interest on the preference share will also be paid ahead of the ordinary share dividend but after the payments due on debentures.

Your reasoning on the Lloyds bond question makes sense to me.

[Menelaus]

There is also a pecking order in the event of Company failure with debenture holders first in the queue, preference shareholders next and ordinary share holders right at the back with little real prospect of repayment. I remember as a teenager investing £20 of my hard earned pocket money in Ordinary Shares in the first iteration of the preserved Pontypool and Blaenavon railway Company. I still have on the wall of my railway room, the framed and uncashed cheque drawn on the liquidators in the sum of 20p.

If you could track down the Memorandum and Articles of Association of the Company - the rules governing all its actions - at formation and then later, they should throw some light on how the Company was structuring its equity to meet its business finance needs. Not sure where you'd find those but I guess the National Library in Aberystwyth, County Library, NRM, TNA at Kew might be places to start. I'd imagine they'd be too early for Companies House - a quick search there just now wasn't very productive.

[SimonPencader]

Thank you all once again. Things are starting to make some sense.

Noel's point about the ranking of preference shares seems borne out by the report of a half yearly meeting in 1880 when the C&C directors decided different dividends for A, B and C stockholders, A getting the most, C the least. As the directors had adjourned the meeting previously and the dividend revised upwards I'm wondering if these were preference shares or not. Could ordinary shares also be ranked?

I had assumed that the market would set a value for debentures and bonds that would probably be less than face value. Jay or Holden would sell a £50 bond for, say, £30 as a means to get their hands on some ready cash at a time when the C&C was unlikely to be able to redeem the bond. Tuglesfield buys the bond as an investment a) for the interest paid on it and b) in the hope of redeeming it at its face value. According to the report of the court case interest was paid at the company's offices. I guess Tuglesfield would go to the C&C's office with his bond, present it and be paid the interest.

Thank you Menelaus for pointing me in the direction of the Articles of Association. BT41 at Kew seems a likely starting point, Board of Trade: Companies Registration Office: Files of Joint Stock Companies Registered Under the 1844 and 1856 Acts. Something for my next trip to Kew...

[glyncowbridge]

Bit late joining this one.
H J Tarrant (1867) described Lloyds Bonds as a new form of financial instrument which effectively increased a railway's borrowing powers over the statutory maximum. The Bonds were typically issued to contractors, in lieu of cash, for work done and because they were often issued at a large discount they were generally disliked by shareholders. If you can access JSTOR you'll find Tarrant's pamphlet entitled 'Lloyds Bonds their nature and uses' at LSE Selected Pamphlets at http://www.JSTOR.org/Stable/60240934.
There's an interesting short. background work, though now a little dated, called 'Capital formation by railways in South Wales 1836-1914' in Modern South Wales Essays in Economic History (University of Wales Press 1986)